Thu. Sep 21st, 2023
    The Success of Necessity-Based Commercial Real Estate during the Pandemic

    The COVID-19 pandemic has had a significant impact on the commercial real estate market, with the office sector being one of the hardest hit due to the remote and hybrid work trends. Conversely, necessity-based commercial real estate (CRE) has thrived during this time, according to a report by Benzinga. Necessity-based properties, such as grocery stores, multi-family housing, and healthcare facilities, have remained in high demand regardless of market conditions.

    The ability of necessity-based CRE to excel while other sectors struggle makes it an attractive investment for investors. The consistent demand for these types of properties helps to safeguard investments from major market fluctuations, allowing CRE investors to diversify their portfolios safely.

    Several factors contribute to the success of necessity-based properties. Socio-economic conditions have played a role, as these properties provide essential services that people always need. Additionally, strip malls have proven to be strong investments in the CRE market. Leased occupancy in strip malls reached the highest level in eight years during the first quarter of 2023, according to real estate advisory firm Green Street. Moreover, physical occupancy has remained near pre-pandemic levels, indicating the demand for these spaces.

    Landlords of strip malls have experienced success in finding single tenants for large anchor spaces, eliminating the need to divide them into smaller units to attract tenants. This indicates a strong market for necessary businesses. Releasing spreads, the difference between the previous tenant’s rent and what the incoming tenant pays, have increased after a significant decrease in 2020. This growth suggests sustained demand for strip center spaces.

    The flexible working trend, with more people working remotely, has contributed to the growth of strip malls. Customers are spending more time in their residential areas rather than in city centers, where their offices are located. Additionally, as people have moved from big cities to the suburbs, strip malls have become even more in demand. While city centers have experienced a decline in the number of retail establishments, the inner suburbs have seen an increase.

    Office occupancy levels remain at half of pre-pandemic levels, leading to an increase in workday lunches at strip mall restaurants closer to workers’ homes. Personal care services such as massage, dental care, chiropractic, and medical laboratories, which are typically located in strip retail centers, have also witnessed consistent demand in recent years.

    The success of necessity-based commercial real estate during the pandemic is a result of its essential nature and the shifting demands of the market. As the commercial real estate landscape continues to evolve, investors are recognizing the value and stability of these properties.

    – Benzinga
    – The Wall Street Journal
    – Green Street
    – National Association of REITs