Despite COVID-19 setbacks, office, retail and hotel sectors are here to stay

Article written for The Crittenden Report. Click here to view on The Crittenden Report’s site. Image: zhu difeng/Adobe Stock

Many have the belief that while hybrid and remote work models have exploded in the last two years, office space is still here to stay. Some are still seeing a healthy appetite for office deals.

Laura Gonzales, regional managing director and director of Capital Markets at Franklin Street, said she’s seeing several office acquisitions and recently financed a large office building non-recourse with the best terms for a low rate.

Maxx Carney, director at JLL Capital Markets, said the short-term lease momentum for office space is likely temporary. Offices will begin to offer concessions, such as reduced rents, so long as they maintain the longer-term leases.

In addition, Carney said more lenders will be chasing office deals that show significant opportunity for growth, as opposed to more traditionally secure properties that have potential downside risk.

“Lots of lenders are saying, ‘I only have downside risks in my portfolio and would rather have a deal with 75% occupancy and be chasing upside, instead of protecting an asset against the downside,’” Carney said.

Retail and hospitality are two classes that have taken a hit throughout the pandemic, but both classes will continue to evolve in a way that meets the new needs of the market and warrants investments in those property types.

In the hospitality sector, many are still unsure of how business travel will look in the coming years.

Gonzales said hotels in business communities and suburbs have been slower to recover than markets with high tourism or population.

“We are starting to see [hotels in non-tourist areas] being considered, but they are very location-specific as to the demand and interest of lenders,” Gonzales said.

Overall, the reemergence of tourism is seen as a positive step in the right direction that will continue to fuel the hospitality industry back to its pre-COVID state.

On the retail side, lenders don’t expect to take on many deals outside of grocery-anchored retail and large regional malls.

Carney said outside of those two types of properties, it’s tough for out-of-state lenders to understand the dynamics of a specific piece of retail real estate and how it fits into the regional market.

Thanks to the pandemic, flexibility of living and working from anywhere has motivated many people to relocate to areas with warmer climates. This has not gone unnoticed by the industry as residential and commercial real estate sales have increased in markets such as Florida.

Florida-based Gonzales said business-friendly policies are another motivator for lenders to focus on deals in southern markets.

“I believe the growth will continue in areas with low tax rates, good weather and strong economies,” Gonzales said.

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