Commercial real estate is one of the industries that was heavily impacted by the COVID-19 pandemic. According to Barclays, a long-term shift to remote work could lead to a 10%-20% structural reduction in demand for office space. The lender also predicted that between 15% and 17% of U.S. shopping malls may need to be redeveloped for other uses. The industry also is concerned about inflation, interest rates and pending legislation.
Three commercial real estate sectors have thrived through the disruption: warehousing, distribution centers and health care facilities. This trend is expected to continue.
Other sectors of commercial real estate have not been as lucky. There are vacant properties across the landscape, from Main Street to strip malls to large malls and hospitality properties.
All is not gloomy, however. For example, it has been predicted that by 2024, commercial and institutional building construction will generate $38 billion of revenue in New York and $58.4 billion in Texas. That means that despite the difficulties and the downturn, there are ways to repurpose commercial real property to meet the needs of the newly created, and still-emerging, post-pandemic business environment. In some cases, properties can be built to suit the needs of specific tenants.
While the prospect of vacant properties can be daunting, there are opportunities for landlords and real estate investors — as long as they are willing to undertake the marketing, legal and financial due diligence needed to make smart decisions.
Here are four possible opportunities for reinventing how commercial real property can be used:
- Warehouse and distribution space. The move toward online shopping accelerated during the pandemic. In some locations, this created a shortage of warehouse space. Some property owners saw the need and repurposed some larger properties, including vacant department stores, into fulfillment centers for online retailers. Others turned vacant properties into data centers or company headquarters.
- Mixed-use property. Mixed-use properties, which offer diversified income streams, potentially reducing investment risk, provide another way to repurpose vacant properties. The shift to mixed use can take unconventional forms. For example, there is a growing need for health care properties, and some landlords are leasing individual stores or larger properties for use as health care facilities.
- Green building. Public interest in the environment and corporate social responsibility makes green building another attractive opportunity. Green certifications can chart a path. LEED (Leadership in Energy and Environmental Design) certification is for all building types and all building phases including new construction, interior fit outs, operations and maintenance, and core and shell. Another type of certification is air hygiene certification, which requires buildings to meet a standard of excellence for indoor air ventilation, filtration and purification.
- Opportunity Zones. The Opportunity Zones created by the Tax Cuts and Jobs Act of 2017 are a possible avenue for investing. Opportunity Zones, which usually are located in lower-income areas, can provide tax savings for investors. Note that while investments in qualified Opportunity Zones can be made until Dec. 31, 2026, the end of 2021 is the deadline for an investment to be made in order to have held it for five years as of Dec. 31, 2026, the current cutoff for a 10% basis step-up and related capital gains exclusion.
There are many nuances to the due diligence examination required for any of these potential uses. Each option comes with its own set of opportunities and challenges, including parking ratio requirements, noncompete language embedded in existing leases, plumbing capacity and zoning restrictions. Tax ramifications and finding financing are other issues. Getting professional advice is the key to a comprehensive due diligence examination that will lead to a profitable investment.