Market Comparison: Residential vs. Commercial

Due to the circumstances that led to record-low mortgage rates, it is no surprise that the residential housing market is blistering. It seems as though everyone and their grandmother are refinancing or trying to list their home in specific markets that favor sellers, or, in other words, when the demand for residential housing is higher than the supply.

This typically leads to higher closing prices, bidding wars, and a sharp decrease of a home’s average days on market. Despite this, buyers are still eager to utilize their pre-approval letter, stamped with a beautiful, low interest rate, and go house hunting.

On the flip side of things, commercial oriented real estate has been hit hard by the coronavirus pandemic. Federal and State regulations hit shopping malls, office buildings, and other commercial properties like restaurants and retail stores hard.

Nowadays it seems easier for employees to work from home, given the rise of cloud and internet based productivity tools, and the effect this will cause in the coming years is questionable.

The Expert Panel at Forbes quotes that “in past downturns, there is a massive reallocation of capital for investment to commercial sectors deemed safer with cash flows that are perceived to be more durable”. This would lead one to believe that investment into commercial real estate should shift from sectors such as office, retail, and hospitality to multifamily housing, industrial, and medical sectors within real estate.

One thing that has personally always drawn up curiosity within myself is the emergence of database storage center facilities, as we shift to a more remote, online workplace going forward. It is difficult to say whether or not companies will completely eliminate physical office spaces.

I have a sense that this would absolutely not be the case, however, and once the pandemic is over with, the majority of employers will require employees revert back to doing business as usual in a physical, brick and mortar office space.

In addition, the same could be said about retail. The rising popularity of online shopping and “free 2 day shipping” may likely lead to less demand for commercial real estate zoned as retail properties. What ends up happening with the retail sector is ultimately dependent on the average consumer and their preferences. The emergence of the newest generation must also be taken into consideration when analyzing the performance of the retail sector going forward.

Thus the question is raised. Will more aid from the government be needed in order to make it out of our current situation? Foreclosures on commercial properties are within the horizon and the fact that our society is becoming more internet based may yield bad news for certain commercial sectors within real estate.