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Coldwell Banker Commercial National Real Estate Outlook 2021: Opportunities Emerge in Office & MOB as Pandemic, Technology Shift Models - Part Three

This is the final part in a series of insights shared by the Coldwell Banker Commercial team in collaboration with local leadership and real estate professionals from around the country. Their collective insights into the micro and macro market trends for the coming year encompassed an array of asset classes, user types, and investor profiles ranging from private investors to users of all property types.

This post highlights how government-ordered lockdowns impacted property sectors, including office and medical office markets, and looks into the role the pandemic and technology played in commercial real estate. Here’s a link to the first part in the series, a national overview, as well as the second post, on asset class performance.

Office Model Shifts

Nationwide stay-at-home orders and uncertainty caused by COVID-19 impacted the U.S. office market at unprecedented levels, with vacancies expected to reach an all-time high and rents to decline by 11.7%, or much more in 2021, according to researchers at REIS. The lockdown has changed the way many people work and demonstrated that a considerable number of tasks can be accomplished outside of the traditional office space – leading many companies to adopt flexible schedules.

With the need to commute drastically reduced, many people have relocated to the suburbs, which in turn, will impact the future of office space, especially in urban markets. Working from anywhere will become the new norm – though as risks related to the pandemic are mitigated people will likely explore places to work remotely besides their homes. Work style changes may bring back shared service models like coworking; and an increase in hybrid workers will likely spur demand for small office spaces over larger ones as companies rethink the need to maintain expensive real estate portfolios.

CBC NRT’s Bill Ukropina says, “New office spaces will likely include large conference rooms and accessible outdoor areas where offsite employees can meet occasionally for training and bonding. Parking needs will be significantly reduced.”

Suburban Markets Surge

The ability to work from anywhere will fuel growth in secondary and tertiary markets as high-wage city renters continue to become suburban homeowners in 2021. This accelerated population shift to the suburbs, as a result of COVID-19, will create new development demands to replicate the city-like amenities that Millennial and Gen-Z workers are used to and desire. Because these people still have the same expectations of an urban lifestyle, smaller markets will need to recreate themselves with restaurants, shopping, delivery services, entertainment, and everyday conveniences. As a result, Coldwell Banker Commercial expects investment and recovery in the suburbs to outpace urban markets for several years.

Coldwell Banker Commercial’s Nic Sakalis says, “We’re seeing a high exodus of businesses leaving NYC to go to the suburbs and demand for one- to three-unit offices for satellites are going quickly.”

Medical Offices Expand

A general reluctance to seek medical care in hospitals, where risk of exposure to extremely sick people is high, is expected to drive strong demand for outpatient care over the next year. The pandemic not only accelerated the need for outpatient locations, but it is also requiring more square footage to support new pathways for patient flow, telehealth services, and flexible screening areas. Owners and investors seeking medical office product will need to adapt their searches to align with these new design solutions. They will also likely need to find easy accessibility to senior housing facilities and other high-density residential projects.

Coldwell Banker Commercial’s Todd Glaskin says, “Medical tenants need the physical space and are paying for it or expanding.”

Tech Adoption

Coldwell Banker Commercial expects property owners will continue deploying smart technologies to keep buildings competitive and operating expenses steady, though the COVID-19 pandemic has led to significant changes in day-to-day property management. Landlords are now conducting much of their business online – with virtual walk-throughs, e-signatures for leases, lockboxes for access, and apps to collect rent and accept maintenance requests. Many owners have embraced video calls to proactively communicate with tenants and carry out repairs. Digital technology is expected to continue to transform this business post-pandemic.

Conclusion

Coldwell Banker Commercial’s Spiegel concludes, “Context is important – this was not a real estate led recession. Many investors are well-capitalized and remain active in the market, even during the shutdown, especially local private investors and those with 1031 tax-deferred exchanges.”

As a result, cap rates are anticipated to continue on a steady to downward trajectory when the crisis eases, with exceptions in retail, hospitality and mid/high-rise office which could remain unstable over the next few years. Coldwell Banker Commercial expects land sales for housing and industrial development product to continue to be in short supply in 2021. Freestanding net lease formats, drive-thru retail and essential businesses should also hold up well compared to actively managed retail over the next few years.

 

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