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Unlike landlords who hold retail real estate, office real estate owners are likely to fare better with rent collection. With malls closed during the pandemic, their tenants face massive cash-flow challenges, which compromises their ability to pay rents. The good news is that online retail sales are up for some retailers. The bad news for retail landlords is that a shift from brick-and-mortar retail to e-commerce would further lower the demand for retail real estate.
Whereas offices are also closed to employees except for essential workers, office work continues from home, thanks to telework. The business models of office-based firms are thus disrupted, but not discontinued. Hence, many office-based firms can conduct their business remotely and can meet their rent obligations.
A shift in demand for more modern and better-quality office space might also occur. Higher-end office real estate equipped with, for example, advanced HVAC systems and fast elevators, are more likely to adapt readily to social distancing requirements. In comparison, older B Class real estate may find it hard or prohibitively expensive to comply with regulations for improved ventilation and greater distancing between employees.
Telework may not be for everyone. The C&W report revealed that while younger cohorts, i.e., millennials and Gen Z workers, expressed the strongest desire for flex-work options, they found telework more challenging than older cohorts. Shared living arrangements, smaller dwellings, and a lack of dedicated space to work from home could be the reason for younger workers’ struggle with telework.
Real estate markets are in flux, and nothing about the future is known with certainty. Contingency planning based on probable future outcomes will allow smart landlords to cope with the changes heading their way. Waiting for a return to the old normal may not be a wise strategy.
Murtaza Haider is a professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.
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