The Offices at City Center, in downtown Lexington, occupies the first nine floors of the 12-story tower.
Commercial real estate is looking to a future changed forever by the COVID-19 pandemic. Some aspects of the commercial market have seen increased activity, and the pandemic has dramatically affected how some areas of the market will move forward and when, local experts say.
Over the course of the past year, development land and lot sales, building purchases for owner occupants, industrial leases, industrial property sales and single tenant investment property sales have all been active areas, said Al Isaac, president of NAI Isaac.
“Office leasing slowed this year with tenants assessing the impact of COVID-19. Mid-level investment retail and office property sales have slowed with purchasers being unsure what the correct pricing should be, but interest seems to be increasing as COVID-19 vaccines are becoming available,” he said.
But lower interest rates, spurred by the Federal Reserve’s reaction to the economic downturn created by the pandemic, had a positive influence on the market, he said, as did an increase in demand for industrial facilities driven by increased shipping needs during the national health emergency.
The pandemic, however, created very visible challenges for restaurants, retail, hospitality and event businesses as government shutdowns and reduced capacities were put in place to slow the spread of the coronavirus, he said.
“Even after the pandemic, there will be more emphasis in the restaurant industry on carryout, delivery and drive-throughs for concepts that were forced to adopt the measures but found that it is an efficient way to service more diners and expand sales,” he said. “There will be some distressed retail, hospitality and office properties available on a national basis, but I do not expect there to be significant numbers of these properties in Central Kentucky.”
The inventory for commercial real estate, he said, is about the same as it was pre-pandemic, even as office tenants take a more cautious stance on space.
“There is slightly more small shop retail and restaurant space available, but vacancy is still only about 8 percent. Retail vacancy will likely increase in the first quarter with absorption to begin in late second quarter. Industrial vacancy is about 3.5 percent. Office vacancy is about 13 percent,” he said. “Most office tenants took a wait-and-see approach to 2020. If a tenant was not required to make an occupancy decision, they didn’t. Third quarter of 2021 should see an increase in office expansions. Due to the distancing requirements in offices, most did not downsize even if staff were reduced or some worked from home.”
For the most part, he said, he expects the first and second quarters of 2021 to continue to see impacts from the pandemic. However, he expects to see a recovery gain momentum in the third and fourth quarters, with increasing expansion in all sectors.
Opportunities lie for those working from home to expand their businesses and for those looking to invest, he said.
“Small shop retail and small office spaces rent have not increased, so it will be affordable for people working from home to expand their business into their first commercial space,” he said. “Investment pricing and capitalization rates usually are tied to interest rates. Due to the pandemic’s effect on purchasers’ confidence, the prices on mid-level investment properties have remained the same when, typically, investment property prices increase when the interest rates decrease. Pricing similar to 2019 with even lower interest rates will produce a favorable environment for commercial property investment purchasing in 2021.”
Todd E. Ziegler
Todd E. Ziegler, Central Kentucky market president with Republic Bank, said he expected apartments and houses to continue to be a hot commodity, along with owner-occupied service businesses, manufacturing and distribution centers.
“Apartments and housing continue to be hot. Office space will continue to decline, most likely, as many workers will remain working from home permanently,” he said. “I think there is a possibility for declining values in urban space, primarily office.”
The switch to working from home has meant a decline in value for commercial real estate in urban areas and near major cities, he said. Empty office buildings and empty restaurants have impacted sales, he said, forcing values down and slowing sales.
But for lenders, that means that while there are competitive deals out there, there’s a need for more strict underwriting guidelines, especially surrounding cash flow.
Nationally, according to Deloitte, a multinational professional services network, the forecast is optimistic.
With a vaccine on the way, Deloitte anticipates the economy returning to normal mid- 2021, with pent up demand spurring growth and employment.
“We’ve included an optimistic scenario in this forecast, one that assumes that pent-up demand quickly boosts sectors such as travel, food and accommodations; and recreation services, once the threat of the pandemic goes away,” the company said in its latest Insight report. “And since these sectors tend to employ lower-paid and therefore lower-skilled workers, rehiring can happen more quickly than in sectors such as durable goods manufacturing that are typically hit hard during recessions.”
However, it’s not clear exactly how bad the damage that’s already been done will be, the company said. It estimates that employment growth will be restrained in the initial recovery, with the economy hovering near 2 percent growth for the next five years.
The Federal Reserve’s actions during the pandemic, lowering interest rates, as well as banks remaining well capitalized, will mean many companies will continue to be able to borrow at relatively easy terms in the short-term future.