The pandemic presented some surprises. No one expected anything would so thoroughly gut the hospitality industry. Yet, COVID did. Experts are projecting that recovery is about two years out if all goes well and many believe that the landscapes of cities may forever be changed.
“These changes to lifestyle and work habits affect not only the workforce but also the utilization of commercial properties across all sectors,” according to Dimitri Tournas, LLP with Withers. “Some sectors – notably hospitality, office, and retail – are among those hit hardest by these forced changes. The question now becomes: how do developers, landlords, managers, lenders, tenants, and consumers maximize existing and future real estate projects in a post-pandemic world?”
Office buildings were rendered obsolete – emptied almost overnight from pandemic restrictions.
And according to the Bank of Canada’s recently updated Financial Systems Review, developed nations around the world are facing many of the same challenges.
“Canada and most advanced economies face similar financial and economic realities. In its latest Global Financial Stability Report, the International Monetary Fund (IMF) identified several key vulnerabilities in the global financial system.2 In particular, it pointed to signs of excessive risk-taking and stretched valuations. Given these elevated financial vulnerabilities, a sudden decline in investors’ risk appetite—perhaps due to a major setback in the global recovery from the pandemic—could result in a sharp deterioration in global financial conditions,” according to the report.
The IMF pointed out that inflation remains a concern and “a sharp rise… could trigger a reassessment of risk and a repricing of assets.”
Both the Bank of Canada and the IMF note concerns about the commercial real estate sector as a result of “structural shifts” caused by the pandemic, i.e. online shopping and remote work that translated to empty office buildings and shuttered brick and mortar stores.
“There is no doubt that this pandemic has shifted things. Yet, the brightest business minds are focused on it – trying to help their companies and entire industries effectively pivot,” Kris Thorkelson, owner of Thorwin Properties in Winnipeg, Manitoba said. “Canadians are resilient. We will find a way to thrive after we survive.”
Forward-thinking is already shaping the future of some commercial properties. The concept of the “third space” is gaining traction.
AS Joel Shen, Withers Bergman LLP – New Haven Office, noted, “flexibility is key to the future of the real estate.” As a result, the third space is rising.
“Flexibility will be at the heart of the development of all types of property and a single-use district will not be sustainable,” he wrote. The paradigm shift has begun – work will look different, which means that commercial real estate will be forced to adapt. “The days of whole buildings being occupied by a single tenant for a single purpose – in this case for use as offices – they say are over.”
Office cubicles are to fade like bad memories as there is a genesis of shared space, room to work and socialize without being chained to an office.
Hotel groups are beginning to see the need and the opportunity.
Shen explains it well: “The third space is outside of the home and office where people can work but also socialize (and perhaps exercise)… luxury and business hotels are marketing their spaces as both flexible working spaces and areas for accompanying family and children such as on-site gyms, conference venues, swimming pools, and lounges.”
As people begin to migrate to the suburbs, investors may want to begin looking for opportunities there as well. A revitalization is underway, spurred by the COVID migration. Opportunity is everywhere.