A New Landscape

Commercial realtors respond to changing workspace needs

By Ryan G. Van Cleave

October, 2020 – buddy Jeff owns a beer-and-burger joint in Wisconsin, and when Covid-19 arrived in his neighborhood, it hit his business hard. Because of positive cases among his employees, Jeff shuttered his doors for a few days, then a few weeks, and now it’s been months. He’s finally decided what to do—let the lease lapse and move on to another career after fifteen years in the restaurant business.

That got me wondering. What’s the situation with the commercial real estate market in our own community? Will we see more empty storefronts and closed signs? Will there be an exodus of small—or even not-so-small—businesses? Or are things a bit more hopeful than all this?

To get an expert take on the situation, I asked folks at three different firms serving Southwest Florida’s Gulf Coast to share their experiences. Michael Saunders & Company’s Commercial Division, SVN Commercial Advisory Group, and Harshman & Company, Inc. all seemed well positioned to answer my questions.

In all your experience with the COVID-affected real estate world, what has surprised you the most?

The number of commercial real estate sale/lease transactions continuing to take place during the pandemic has surprised me. Yes, the activity of commercial real estate sale/lease transactions is less compared to this time last year, but I expected a much larger drop. It will be interesting to see how the third and fourth quarter of 2020 play out. 

—Scott Cietek, Director of Commercial Real Estate, Michael Saunders & Company’s Commercial Division

If one was anticipating a complete STOP in the commercial real estate market, that person would be pleasantly surprised. 

There has been “non-stop” interest by developers for multi-family sites and demand by investors for income-producing real estate has remained strong. 

Some leases and tenants have failed due to COVID19 lock down but the percentage of “newly vacant space” is relatively small.  The shake out in the restaurant and fitness businesses has yet to be fully realized.

Interestingly the demand for Sarasota residential real estate has remained strong during COVID-19.  The movement to the SunCoast has been strong for several years and residential activity has been further buoyed by buyers and tenants fleeing the unrest and confusion in many major metropolitan areas and moving  to safe havens like Florida and Texas.

—John B. Harshman, Principal, Harshman & Company, Inc. 

How are companies changing their mind about space needs?

Office users are wondering how the ability of their employees to work remotely will impact their office requirements going forward. 

Companies are reevaluating the use of private offices, conference room layouts and technology, the nature of shared space, and the impact of virtual work on their human resource policies, as well as their space needs. As this all sorts out, many businesses are holding steady with their real estate in order to evaluate the new realities of their real estate requirement.

The result is often a pause or shortened term commitments. It is likely that the office use will change but it will not be eliminated. The need for 6 feet of separation will be with us for a while whether by a real or psychological mandate. The balance of virtual work with the need for corporate culture, face-to-face interaction, and innovation ensure continued reliance on office space in a new form.  

—Susan Goldstein, Certified Commercial Investment Member (CCIM), MBA, Michael Saunders & Company’s Commercial Division

What is the landscape (and future) of commercial real estate?

The coronavirus has caused considerable economic disruption in our market, but some sectors of commercial real estate are faring better than others.  Prior to the pandemic, many areas of the industry were on pace for another record year.  Retail has seen several closings and appears more exposed to the effects of the pandemic than any other property type.  

Sarasota office vacancies are currently around 5.5%, with an expected annual rent growth of about 2%.  While the full impact of the pandemic remains to be seen, we are already seeing signs of shifting preferences.  Several local employers are finding remote work successful and some firms are reconsidering their requirements and moving into smaller office space.  The medical office sector, on the other hand, has been growing precipitously due to nearly half of our population being 65 or older.

The multifamily market remains in an extraordinary supply trend and construction activity has been exceeding the national average for nearly a decade.  The pandemic may have given developers some pause as new starts fell recently. However, Sarasota is still building at a level of nearly twice the national average when measured by percent of existing inventory.

—Matt Christian, Managing Director, SVN Commercial Advisory Group

Are as many leases being broken as I imagine?

The majority of my day-to-day business is in the office leasing market. And when the pandemic and ensuing lockdown hit—we feared the worst. Was this the end of the office market as we know it? 

As it turns out, no, it wasn’t. The market is simply shifting to adapt. We’re still getting a healthy amount of office inquiries, large and small. People need that workplace connection. And people need that separate location to help facilitate a healthy work/life balance in the long run. It won’t be surprising to see a shift in the type of floorplans that companies want to ensure regular separation inside the offices. But for the most part, the Manatee-Sarasota market seems to be of the resilient mindset that this is a temporary setback and we’ll weather the storm and be back to a normal life soon. Or at least fairly close to it. 

Commercial real estate will always be a wise avenue for the overall health of your financial investment portfolio. There are many different “food groups” of commercial real estate (Office, Retail, Land, Multi-Family, Industrial) and in that diversity, when one section of this market begins to underperform, another tends to pick up. For example—in this season of Coronavirus, when office demand initially declined due to remote working and retail stores suddenly took a hit from forced closings—then warehouse demand increased because online shopping exponentially increased. So, retailers and distributors saw the immediate need to acquire more fulfillment space. 

Many others who had been renters and had their futures in the hands of a landlord, have now decided to put their destiny in their own hands, causing much more shopping of freestanding buildings or vacant land to build their own locations. 

It’s an ebb and flow, but the boat stays steady.

—Benjamin Bakker, Commercial Realtor, Michael Saunders & Company’s Commercial Division 

Why should “regular people” care about what happens to commercial real estate?

Consumer consumption is the lifeblood of our economy. We track our successes and failures based on spending. When consumers are confident in their financial position to spend their discretionary income, both “regular people” and commercial real estate wins. 

To elaborate, let’s review the big picture of a single vacant retail or restaurant space. It is not simply a landlord missing out on rental income. It is also the potential unemployment of a number of employees and restaurant staff. And without the employment of those “regular people,” they cannot be consumers elsewhere. Not to mention the void that was once a potential consumer venue.

—Lee DeLieto Jr., PA, Michael Saunders & Company’s Commercial Division

Is residential real estate undergoing the same effects of COVID?

Due to a shortage of inventory, demand in the Sarasota-Manatee-Charlotte county residential real estate market is performing very well right now. 

The overall supply is still low in our tri-county market, which leads to a seller’s market. The last time we had this low a level of active inventory in our Tri-County area was back in 2015. Residential appointment showing requests and new pending contracts are rising and holding steady. Home prices continue to rise during the pandemic.

—Gareth Watson, Senior Research Analyst, Michael Saunders & Company’s Commercial Division