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How the COVID-19 pandemic is impacting commercial real estate

When the COVID-19 crisis broke out in the US in March, 2020, one of the major markets to be seriously affected was commercial real estate. As has been happening around the country, business closures, stay at home orders, social distancing measures, and other factors impacted commercial real estate in the Tampa Bay area significantly more than they did residential real estate.

A few more months into the crisis, it appears the pandemic isn’t resolving itself as fast as everyone had hoped. This means investors and landlords not only have to brace themselves for what’s yet to come, but find ways and initiatives to adapt, survive, and thrive through it all.

How commercial real estate in Tampa Bay, FL is impacted by the pandemic

By the end of 2019 and the start of 2020, commercial real estate in the Tampa Bay area has registered record gains. Hillsborough County finished the first quarter of 2020 with the highest sales volume in the last 12 years. In the last quarter of 2019, the vacancy rate in Pinellas County was at an all-time low

By the end of the second quarter, however, sales volume in Hillsborough County was its lowest since 2011, dropping by 70.8% from the first quarter. Unemployment rate in the Tampa Bay area went up to 13.1%, about 1000 basis points (bps) higher than the previous year. About half or around 51,700 jobs in the Leisure and Hospitality sector were lost.

The vacancy rate in the Tampa Bay MSA rose to 12.8% in the 2nd quarter of 2020, about 120 bps higher than the previous year. Suburban markets fared better, with an increase in vacancy of about 100 bps, compared to the vacancy rate increase in the CBDs of 180 bps.

New leases fell in the second quarter of the year by about half of the volume registered in the first quarter. About 78% of all leasing deals in the 2nd quarter took place in the suburban submarkets. However, the I-75 Corridor submarket, which mostly houses warehouses, logistics, and other industrial businesses, posted a gain of 78% in leasing activity compared to the same period in 2019. 

Despite the decrease in demand, however, rental prices increased by 2.1% in the second quarter of 2020, compared to the 2nd quarter of 2019. In addition, new construction activity continued in the Tampa CBD, with an estimated 1.4 million square feet of commercial real estate under construction. 

Challenges faced by landlords and investors

As previously mentioned, the retail and hospitality sector in the Tampa Bay area is the worst hit in the crisis as a result of mandatory closures and stay at home directives. 

The residential and industrial sectors, however, have shown a consistent flow of sales and leasing activities in the last few months. They made up 61% of the total commercial real estate sales volume in Hillsborough County. 

Regardless of the sector, all landlords and investors must deal with common challenges in the face of the crisis.

  • Financing
    Many lenders are cautious in granting financing for new real estate purchases. In March, delinquency in commercial mortgage-backed securities throughout the country rose for the first time in the last three years.
  • Cash flow
    Business closures and delays in rent payments are affecting cash flows and liquidity, particularly in the retail and hospitality sectors
  • Low investor confidence
    As the situation continues to play out, many investors are taking a wait-and-see attitude and are deferring CRE investment plans
  • Increasing vacancy
    As work from home practices and social distancing continue to be the norm, many establishments, offices, and co-working spaces may continue losing tenants and clients
  • Higher costs of operations
    With significantly enhanced sanitation, social distancing, and health check measures needed to be put in place, the costs of operations in commercial properties have also increased

Opportunities to watch for

Through all the challenges and difficulties, however, opportunities in the Tampa Bay CRE market are presenting themselves. 

  • The surge in e-commerce and online purchasing has increased the need for more warehousing space and fulfillment centers. This explains the robust activity seen in industrial real estate, including properties in the I-75 Corridor.
  • Grocery stores and pharmacies have been enjoying brisk business with the increase in demand for daily household supplies, as well as the need to stock up on sanitation products, maintenance medicines, supplements, and medicines for common ailments. 
  • Demand for rental properties in suburban areas is likely to increase as more and more people are choosing to move from congested urban areas, where contagious diseases tend to spread more rapidly, to the more spacious and less crowded suburbs
  • If more businesses continue to fall to the effects of the pandemic, savvy investors might soon find opportunities in distressed properties and price decreases in CRE properties

Navigate the complex Tampa Bay CRE market with the experts at Viewpoint Realty International. With over 40 years of experience, you can rely on the team to provide you with the insight and guidance you need for success. Get in touch today at 727.584.7355 or send an email to viewpointrealtyinternational(at)gmail(dotted)com.