Class A apartments

Class A apartments hit hardest by pandemic

Key insights and predictions on the long-term impacts of COVID
Tuesday, November 3, 2020
by Erin Ruddy

As COVID-19 continues to put pressure on the commercial real estate sector, some asset types are fairing better than others. In terms of multi-residential properties, Class A apartments in large downtown centres are feeling the strain more than their Class B and Class C counterparts.

“Multifamily has faired better than we all expected through this [pandemic], certainly compared to previous recessions,” observed Jeanette Rice, Americas head of multifamily research at CBRE. “The suburbs are outperforming urban cores right now, with housing starts down overall, but not dramatically.”

Speaking at an Urban Land Institute (ULI) webinar in late October, Rice and her fellow panelists largely concurred with the findings presented in ULI’s recent economic forecast. Incorporating the opinions of more than 40 leading economists and industry analysts, the survey looked at several real estate indicators—including employment, GDP, housing prices, inflation, REIT returns, vacancy/occupancy rates and rents for five property types, and housing starts.

Richard Kleinman, managing director of research strategy, LaSalle Investment Management, referred to the findings as “middle of the road, with a fair balance of upside and downside.” Calling our current economic situation worse than the recession of 2001, but slightly better than the Great Depression, the panelists agreed that the beleaguered GDP should recover in as little as two years, and that labour markets will take longer to recover, likely in about three to four years.

“We’re in a blue-collar recession,” Kleinman said, noting that lower paying jobs have been hit the hardest.  “Employment will lag—it always does. But hospitality, retail, and jobs associated with the restaurants and beverage sector will need more time to come back.”

Impact on vacancies 

In terms of housing, rent collections on Class C apartments have been the most challenged compared to As and Bs, but Class A apartments are seeing more vacancies as students and young professionals return home to save money, or reduce their exposure to COVID-19. Landlords are finding it harder to turnover these more expensive units compared to those in Class C buildings, which are typically occupied by lower income tenants and families dependent on their rental housing.

Will this exodus continue once the threat of COVID lifts?

Rice predicts many residents will want to remain in suburban markets or seek out homes in more affordable neighborhoods long after the advent of a vaccine. With technology making remote work seamless, and less requirement to suffer the daily commute, satellite communities may have a lot to offer in terms of affordability and space well into the future.

Remote work

Supporting this notion are key findings from the first global report to look at the impact of the “Future of Work” on buildings and cities over the next three to five years. The recent survey of 555 real estate professionals, including investors, developers, architects, planners and other service providers, found that “a strong focus on flexibility”— not only in terms of work activity but also the space and location — is the direction we’re heading in a post-pandemic world.

Increased remote working (96%) and more use of satellite offices at the edge of cities (67%) are trends expected to develop and continue. The resulting ecosystem of workplaces will “accelerate a blending of uses between residential, hospitality and office spaces, and a shift in language from ‘office’ to ‘workspace’.”

Anticipated impacts on the real estate industry include increased demand for flexible office footprints (96%), flexible lease contracts (66%) and more widespread use of co-working facilities by large corporate occupiers (60%).

53% of respondents said they anticipate a decrease in the office space needed by their organization, while only 37% envisage no change.

“Flexibility is the consistent demand we are hearing,” said Lisette van Doorn, CEO of ULI Europe. “Employees expect it from their employers and corporates from their landlords. Especially over the shorter term this focus is accompanied with a drive by corporates to save costs, as many try to cope with the negative economic impacts deriving from the pandemic.”

According to EY Consulting Associate Partner Vincent Raufast, remote work makes real estate more critical. “While the total office space is likely to decrease, the quality of real estate will be even more critical,” he said. “The physical office space will play a key role in preventing a loss of corporate culture, less effective talent management, a higher staff turnover and a loss of creativity. It will need to meet new demands including healthy building amenities and more space designed for collaborative work, as well as formal and informal meetings with colleagues.”

The report also notes how these things will broadly affect communities and cities. Expected changes include improved access to online public services (93%), the need to develop more efficient local supply chains (92%), less need to commute (91%) and an increasing pressure to focus on social impact, inclusiveness and health for businesses and people (91%).

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1 thought on “Class A apartments hit hardest by pandemic

  1. The office premises simply died out during the quarantine. And I understand when directors of firms or companies refuse to pay rent because they are in financial difficulties. But on the other hand, landlords and homeowners are already suffering. Therefore, this stick is pointed at both ends. I hope the situation will be resolved soon.

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