Pandemics & CRE: Business Continuity Strategies

The COVID-19 pandemic had a profound impact on the commercial real estate (CRE) industry. Businesses were forced to adopt remote work arrangements, leading to decreased demand for office space and significant disruptions to business operations. This report examines the impact of pandemics on the CRE industry, focusing on business continuity strategies. It explores government support programs, insurance options, and technology solutions that can help CRE businesses mitigate risks and maintain operations during pandemics. It also includes expert opinions and predictions on the future of the CRE industry in light of the COVID-19 pandemic and the potential for future pandemics.

Impact of Pandemics on the CRE Industry

The COVID-19 pandemic had an immediate and substantial impact on the CRE market. Workplaces, shopping centers, and hotels emptied, affecting the cash flows of businesses occupying commercial space and the ability of commercial space owners to meet their debt obligations ¹. Delinquent CRE loans surfaced soon after the pandemic started and remained elevated in 2021, posing a potential threat to bank capitalization and solvency, particularly for smaller banks with higher concentrations in CRE lending ¹.

The pandemic's impact varied significantly across CRE sectors. Certain property types, such as hotels, retail, and office, experienced more dramatic stress than others, like multifamily and industrial ¹. This variation can be attributed to the nature of these sectors and their reliance on physical occupancy. For example, the rise of remote work led to a significant decrease in demand for office space, while the growth of e-commerce supported the industrial sector, which includes warehouses and distribution centers.

Similarly, variation in market fundamentals was observed across geographies, with large, urban locales faring worse than smaller metros and suburban areas ¹. This disparity can be attributed to factors such as higher concentrations of office space in urban centers and the exodus of some businesses and residents from densely populated areas during the pandemic.

The pandemic caused a critical watershed for asset value trends in CRE. While retail and industrial values have continued to grow, office has lost 23.3% ($740 billion) of its aggregate value, and multifamily is down 6.1% ($300 billion in losses) ². Office properties in central business districts have been hit hardest, with lease expirations having a larger effect on occupancy and income compared with the period before the COVID-19 outbreak ³. This decline in the office sector reflects the shift towards remote and hybrid work models and the resulting decrease in demand for traditional office space.

Commercial property prices have exhibited markedly different trends both across and within countries during the COVID-19 pandemic ⁴. For example, aggregate CRE prices fell, on average, by 2 percent in Canada as the pandemic evolved in the first three quarters of 2020, while they generally increased in New Zealand. Within Canada, CRE prices recorded the largest decline of about 4 percent (quarter-over-quarter average) in Regina, while they remained stable in Toronto ⁴. These variations highlight the influence of local economic conditions, government policies, and pandemic-related restrictions on CRE market performance.

The pandemic forced the CRE industry to adapt rapidly. While most CRE sectors have shown signs of recovery, the office and some retail segments continue to face challenges ⁵. Popular cities around the world are feeling the sting of the work-from-home era, with rent prices and sale prices of office buildings declining in major cities like New York City and San Francisco ⁶. This trend underscores the need for CRE businesses to adapt to changing workplace preferences and explore alternative uses for office space.

Government Support Programs for CRE Businesses During Pandemics

Governments worldwide implemented various programs to support businesses during the COVID-19 pandemic ⁷. In the United States, the federal government took significant steps to mitigate the effects of COVID-19 on the economy and the commercial real estate industry ⁸. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020, provided $2 trillion in economic stimulus designed to boost the US economy using grants, loans, and fiscal stimulus equal to nearly 10% of the GDP to help individuals, small businesses, and the commercial real estate industry ⁸.

The CARES Act included provisions for individuals, such as one-time tax rebates and pandemic unemployment assistance, as well as for small and mid-size businesses, such as the Small Business Paycheck Protection Program, which created a forgivable loan program ⁸. The Small Business Administration (SBA) also offered COVID-19 Economic Injury Disaster Loans (EIDL) to provide financial relief for small businesses and nonprofit organizations ⁹.

While these programs provided much-needed relief, their effectiveness varied. Some businesses, particularly smaller ones, faced challenges accessing these programs due to bureaucratic hurdles or lack of information ¹⁰. The timeliness of aid disbursement was also a concern for some businesses struggling to meet immediate financial obligations.

State governments also implemented support programs. For example, California provided a range of programs to support businesses during the pandemic. These programs included:

¹¹

The unprecedented policy measures taken by governments and central banks to cushion the economic impact of the pandemic...source ¹². Studies have shown a positive association between government fiscal support during the pandemic and CRE prices, suggesting that these interventions played a role in mitigating the negative impacts of the pandemic on the CRE market ¹².

Insurance Options for CRE Businesses to Mitigate Pandemic Risks

The COVID-19 pandemic highlighted the limitations of traditional insurance in covering pandemic-related losses. Business interruption insurance, typically covering losses from physical damage to property, generally did not pay pandemic-related claims ¹³. This has led to discussions and proposals for new insurance models to address pandemic risk.

Actuaries, insurance experts, insurers, and reinsurers generally agree pandemic risk—which involves potentially large, widespread, and difficult-to-predict losses—is largely uninsurable because it does not meet key insurability criteria ¹³. This has prompted the exploration of alternative risk management tools and strategies for CRE businesses to mitigate pandemic-related losses.

The Chubb insurance company proposed the Pandemic Business Interruption Program (PBIP), similar to the Pandemic Risk Insurance Act (PRIA) but with modifications ¹⁴. This program would involve government participation and risk-sharing with insurers to provide coverage for business interruption losses due to pandemics. Such public-private partnerships could potentially provide a more viable solution for insuring against pandemic risk, given the challenges faced by the private insurance market in assuming this risk alone.

Crisis management is crucial for navigating the complexities of pandemics and other crises. Some crises manifest linearly, while others, like pandemics, are characterized by a chaotic accumulation of unexpected and systemically reinforcing risks ¹⁵. Insurers have a variety of tools in their Enterprise Risk Management (ERM) framework which are useful in building resiliency and contingency actions against potential crises. These tools fall into two broad categories—underwriting and accumulation management at the policy level, and internal models and scenario analysis to measure and manage more complex accumulations ¹⁵. By leveraging these tools and adopting a proactive approach to risk management, CRE businesses can enhance their resilience and preparedness for future pandemics.

Technology Solutions for CRE Business Continuity During Pandemics

Technology played a crucial role in helping CRE businesses maintain continuity during the COVID-19 pandemic. Cloud computing, smart sensor technology, and virtual platforms enabled remote work, online property tours, and digital transactions ¹⁶.

The pandemic accelerated the adoption of technology in the CRE industry, with PropTech platforms facilitating real estate transactions from beginning to end ¹⁶. These platforms provide tools for property marketing, leasing, and management, enabling CRE businesses to operate more efficiently and effectively in a digital environment.

Building owners and property managers are investing in capital improvements to help companies mandating return to office, which could be good news for suppliers and contractors in several areas. Some examples of these improvements include:

• Innovative office building amenities: Getting creative to offer perks and amenities might entice workers to want...source centers.
• Advanced technology and connectivity: Office properties are upgrading Wi-Fi and technology infrastructure, emphasizing the highest levels of security.
• Improved indoor air quality and sustainability: Post-COVID pandemic, many CRE properties have been implementing air quality improvements.

These investments aim to enhance the tenant experience, attract businesses back to the office, and improve the overall value proposition of commercial properties.

Property owners and portfolio managers face an intensifying need to meet rising tenant demand for robust, high-capacity data connectivity ¹⁸. An organization's capacity to “be connected” is among their most critical business prerequisites....source ¹⁹. This includes technologies for monitoring occupancy levels, managing air quality, and ensuring building security, all of which contribute to creating a safer and more resilient workplace environment.

Expert Opinions and Predictions on the Future of the CRE Industry

Experts predict a recovery for the CRE industry, with some sectors like industrial and multifamily already showing positive trends ²⁰. However, the office sector continues to face challenges due to remote work and changing workplace preferences ²¹.

The Federal Reserve's pivot to reducing interest rates is expected to boost transaction activity and help real estate markets to clear ²². However, a slower economy could affect net operating income (NOI) growth ²². This suggests that while the overall outlook for CRE is positive, there are still economic uncertainties that could impact the pace of recovery.

The future of the CRE industry will be shaped by factors such as supply dynamics, a modernized stock of buildings with amenities like improved wellness features, and the adoption of sustainable real estate strategies ²². The rise of flexible workspaces and the increasing demand for environmentally friendly buildings are also expected to influence the future of CRE.

The 2024 US elections could also have a significant impact on the CRE industry ²³. The outcome of the election and who ends up in the White House will have a big impact on issues such as regulation, trade, corporate taxes, sustainability, and immigration policy. Key issues to watch include potential changes in tax policies that could affect real estate investment, regulations related to building codes and environmental standards, and trade policies that could impact the cost of construction materials.

Conclusion

The COVID-19 pandemic served as a wake-up call for the CRE industry, highlighting the importance of business continuity planning and the need to adapt to changing circumstances. While the pandemic had a significant impact on the industry, particularly in the office sector, there are signs of recovery and renewed optimism.

The pandemic underscored the uneven impact of such events on different CRE sectors. While some sectors, like industrial and multifamily, demonstrated resilience, others, such as office and certain retail segments, continue to face challenges. This highlights the need for CRE businesses to diversify their portfolios and adapt to evolving market demands.

Government support programs played a crucial role in mitigating the negative impacts of the pandemic on the CRE industry. However, the experience also revealed the need for more efficient and accessible programs to ensure timely aid disbursement and support for businesses of all sizes.

The pandemic exposed the limitations of traditional insurance in covering pandemic-related losses, prompting discussions about new insurance models and risk management strategies. Public-private partnerships and government-backed programs could potentially offer more viable solutions for insuring against pandemic risk in the CRE sector.

Technology emerged as a critical enabler of business continuity during the pandemic. The accelerated adoption of PropTech and other technologies is transforming the CRE industry, improving operational efficiency, enhancing the tenant experience, and creating more resilient workplaces.

Looking ahead, the future of the CRE industry will be shaped by economic conditions, workplace trends, technological advancements, and policy decisions. By embracing innovation, adapting to the changing landscape, and prioritizing business continuity planning, CRE businesses can position themselves for success in a post-pandemic world.

Works cited

1. Bank Exposure to Commercial Real Estate and the Covid-19 Pandemic - Federal Reserve Bank of Chicago, accessed December 17, 2024, https://www.chicagofed.org/publications/chicago-fed-letter/2021/463
2. Six facts about the post-pandemic commercial real estate market in the US and what they tell us about the future of retail - Brookings Institution, accessed December 17, 2024, https://www.brookings.edu/articles/six-facts-about-the-post-pandemic-commercial-real-estate-market-in-the-us-and-what-they-tell-us-about-the-future-of-retail/
3. How much will the commercial real estate market's decline hurt the banking industry?, accessed December 17, 2024, https://www.bostonfed.org/news-and-events/news/2024/03/smaller-banks-hurt-less-by-commercial-real-estate-decline-christina-wang-boston-fed.aspx
4. Commercial Real Estate Prices During COVID-19: What is Driving the Divergence? in, accessed December 17, 2024, https://www.elibrary.imf.org/view/journals/065/2022/002/article-A001-en.xml
5. Navigating Commercial Real Estate's Post-Covid Transformation - Forbes, accessed December 17, 2024, https://www.forbes.com/councils/forbesbusinesscouncil/2023/11/17/navigating-commercial-real-estates-post-covid-transformation/
6. The Pandemic's Impact On Commercial Real Estate And Where The Industry Is Going, accessed December 17, 2024, https://www.forbes.com/councils/forbesbusinesscouncil/2023/10/24/the-pandemics-impact-on-commercial-real-estate-and-where-the-industry-is-going/
7. Assistance for Small Businesses | U.S. Department of the Treasury, accessed December 17, 2024, https://home.treasury.gov/policy-issues/coronavirus/assistance-for-small-businesses
8. Federal & Local Support for CRE During COVID-19 | Crexi Insights, accessed December 17, 2024, https://www.crexi.com/blog/federal-local-government-support-for-cre-during-coronavirus
9. COVID-19 relief options | U.S. Small Business Administration, accessed December 17, 2024, https://www.sba.gov/funding-programs/loans/covid-19-relief-options
10. Economic First Responders: How Government Stepped in to Help - Carolina Across 100, accessed December 17, 2024, https://carolinaacross100.unc.edu/economic-first-responders-how-government-stepped-in-to-help/
11. COVID-19 Relief and Assistance for Small Business - State Controller's Office - CA.gov, accessed December 17, 2024, https://sco.ca.gov/covid19reliefandassistancesm.html
12. Commercial Real Estate Prices During COVID-19: What is Driving the Divergence?; IMF GFS Note No.2; August 2022, accessed December 17, 2024, https://www.imf.org/-/media/Files/Publications/gfs-notes/2022/English/GFSNEA2022002.ashx
13. GAO-24-106075, Pandemic Risk: Federal Insurance Approaches Would Entail Costs to Taxpayers and Businesses Might Not Participate, accessed December 17, 2024, https://www.gao.gov/assets/d24106075.pdf
14. PANDEMIC BUSINESS INTERRUPTION INSURANCE - Treasury Department, accessed December 17, 2024, https://home.treasury.gov/system/files/311/CCMR-Pandemic-BI-Report-July-2021.pdf
15. Covid-19: implications for insurer risk management and the insurability of pandemic risk - PMC - PubMed Central, accessed December 17, 2024, https://pmc.ncbi.nlm.nih.gov/articles/PMC7506824/
16. Role of technology in the CRE industry - Awfis, accessed December 17, 2024, https://www.awfis.com/inspiration/workplace-insights/expert-views/role-of-technology-in-the-cre-industry-2
17. Digital Transformation in Commercial Real Estate | by Anthony Trollope - Medium, accessed December 17, 2024, https://anthonytrollope.medium.com/digital-transformation-in-commercial-real-estate-22101dc36f82
18. Building a Stronger Digital Foundation: Transforming Connectivity in Commercial Real Estate (CRE) - Upstack, accessed December 17, 2024, https://upstack.com/blog/network-connectivity-commercial-real-estate-cre/
19. Technology and Workflow in the Real Estate Space, accessed December 17, 2024, https://cre.org/real-estate-issues/technology-and-workflow-in-the-real-estate-space/
20. 4 Reasons We Believe the Future of Commercial Real Estate Looks Bright for 2025 - Crowdstreet, accessed December 17, 2024, https://www.crowdstreet.com/resources/economic-trends/commercial-real-estate-has-promising-outlook-2025
21. 2025 commercial real estate outlook | Deloitte Insights, accessed December 17, 2024, https://www2.deloitte.com/us/en/insights/industry/financial-services/commercial-real-estate-outlook.html
22. Emerging Trends in Real Estate® 2025 - PwC, accessed December 17, 2024, https://www.pwc.com/us/en/industries/financial-services/asset-wealth-management/real-estate/emerging-trends-in-real-estate.html
23. 2024-25 Top Ten Issues Affecting Real Estate, accessed December 17, 2024, https://cre.org/top-ten-issues/2024-25-top-ten-issues-affecting-real-estate/