COVID-19 and Its Impact on the Commercial Real Estate Sector

Written by Nathan Kuhn April 10, 2020

This is the first part of a series on COVID-19.

The COVID–19 pandemic will long be remembered as an event that has forever changed many of the ways we live, socialize, work, and play. The novel coronavirus plays no favorites and is almost boundless in its ability to affect every part of our economy.

Good friends and clients have asked me about how I think the real estate industry will be impacted, first at a macro-level and then more specifically for the 1031 exchange industry and Delaware Statutory Trust investors.

At a macro level, commercial real estate has proven over time to be a fairly resilient asset class, albeit an ever-evolving one. If we think back to a time prior to online shopping, we can remember when small shopping centers were filled with specialty stores. In more recent years, many of those stores have closed or moved, and the vacant space has been replaced by gyms, restaurants, and service businesses. Now, we are seeing another evolution as COVID-19 infiltrates our health, economy, and habits.

Never in our lifetime has an event so fundamentally changed our daily habits and routines as what is happening now. Perhaps life will resume as it was prior to the pandemic; I think it’s more likely that some changes that were slowly evolving might indeed transform more rapidly than they otherwise would have done. For example, online shopping is becoming even more prevalent and pushing deeper into markets such as grocery that consumers were slower to embrace. (Even my parents are ordering their groceries online now!) The same goes for delivery and curbside pick-up. This seems to be a moment where retailers are shifting a “come to us” mentality to “go to you.” So what does this mean for commercial real estate?

As it relates to the 1031 exchange environment, our firm is still helping clients successfully complete their exchanges. However, many of the exchanges I’m currently working on closed on the sale of their property prior to knowledge of the scale and severity of the outbreak. While anecdotally, I’m hearing that sales under contract prior to the outbreak are still closing, I do expect to see a slow down in exchanges in the coming months. When we look back at the data, I think it’s likely we’ll see a reduction in contracts and transactions beginning in mid-March until such a time that the social distancing rules are at least loosened.

I have had an opportunity to speak with many DST sponsors over the last few weeks. While they also foresee a slowdown in exchange investors in the coming months, they remain committed to having DST products available for investors. If you’re in a position or have a need to discuss a potential 1031 exchange, we’re here to help. We take the time to get to know you and your situation so we can suggest and implement the strategies that make the most sense for you, especially in a time like this.