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Challenges facing commercial real estate owners in 2021

With the promising news that vaccines will be ready for distribution in late 2020 and early 2021, commercial real estate experts predict luck will begin to change in the second half of 2021 for owners of hotels, retail or office spaces and other commercial properties.

While some of those assets may not be able to survive after standing entirely or mostly vacant for several more months, experts say the hope for a recovery is getting stronger in the aftermath of the devastating COVID-19 pandemic. Even so, the news hasn’t been all bad for some commercial holdings.

Expectations for real estate properties

Deloitte says property owners will likely have to make critical decisions in the coming months, including crucial investment strategies for existing properties. While some are cutting costs by at least 25%, vital upgrades for ventilation systems, other health-related improvements and digital technology could actually raise costs by nearly $20 per square foot in 2021. Here is an outlook for various types of commercial property:

  • Retail space: More retailers filed for bankruptcy in 2020 than during the Great Recession, particularly clothing and department stores. There are more tough times likely ahead for brick-and-mortar stores, creating liquidity issues for landlords with loans coming due next year.
  • Office buildings: Most of these spaces stood empty in 2020. Investors expect more than 85% of companies plan to have workers return to the office once the pandemic is under control. The shift to remote work for many businesses could mean a permanent 15% reduction for in-office staffing.
  • Hotels: Next year is expected to be another tough one for the hospitality industry as nearly $31 billion in outstanding loans are coming due. Some fear that could cause a record number to go out of business. Experts predict major market hotels will receive 40% to 75% of their pre-COVID revenue, depending upon their locations.
  • Warehouses: These large spaces were the unexpected success story of commercial properties in 2020, and that growth is expected to continue as the demand for e-commerce orders has skyrocketed during the pandemic. Investors looking for opportunities may benefit in this area, especially in Texas, where the population is expected to grow by 9% over the next five years.
  • Apartments: Despite the continuing concern over tenants not being able to afford rent amidst record unemployment and landlords lowering rent prices in many areas, these properties fared much better than expected, and experts believe the demand will continue to be solid in 2021.

Full recovery could take time

While owners of warehouse spaces and apartment complexes are riding out the pandemic in reasonably good shape, recovery for other areas is expected to take some time, and many components could look much different. Industry analysts predict there will be 20% less retail space by 2025.

They say a complete recovery could take as long for the owners of office spaces. The hospitality industry, as a whole, could rebound by 2023. However, many of the upscale hotels catering to business and group travel may not see stability until 2024 or 2025.

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