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The Impact of COVID-19 on the Long Island Commercial Real Estate Market

The Impact of COVID-19 on the Long Island Commercial Real Estate Market

Business slowing and shutdowns due to COVID-19 are having an impact all the way up the chain, from employees losing their jobs, to business owners closing down permanently, to real estate owners losing rent payments. In one survey, the majority of owners of retail space received rent from less than half of their tenants. On Long Island, this has led to a seller's market -- as businesses abandon high-cost properties elsewhere, many of them are looking to call LI home.

An April Bust

Early in the pandemic, the picture was less rosy. The Association for a Better Long Island and the Long Island Builders Institute surveyed their members and found that all of the respondents in the eastern suburbs of New York City experienced a loss of income in 2020's second quarter, and anticipated more losses for the rest of the year. At the time, more than half of respondents expected to experience losses over 20%, and 12% predicted losses over 50%. The majority anticipated that it would take at least a year for economic recovery, with a third expecting up to a five year recovery period.

Retail property owners, in particular, felt the pinch -- some expected nonpayment rates of as much as 85% -- but nearly half of the industrial property owners were still able to collect close to what they did pre-pandemic. Landlords faced the prospect of either floating non-paying tenants for an unpredictable amount of time or having unused space sitting in their inventory. Unfortunately, many of them didn't expect to have many choices in the matter -- 20% expected up to half of their tenants to go out of business and have to vacate. With the average survey respondent representing 1.57 million square feet of leased space, that's a lot of empty units.

With such a grim outlook in April, what changed? Why is Long Island's real estate market looking up now?

A July Boom

Long before the novel coronavirus hit the U.S., everyone from e-commerce entities to hospitals was buying up commercial real estate across New York, New Jersey, and Connecticut. With the COVID crisis, this trend has only accelerated.

Part of it is spurred by New York City's experience sheltering in place. Many families -- including some high-profile lifestyle influencers -- chose to leave the city and hunker down elsewhere. Others found that a city apartment was less than ideal for long periods of isolation. Still, others anticipate that working from home will continue far into the future, and, if they can work from home, why not do it in a more spacious area? While these factors are driving the shift from city dwelling to suburban dwelling, that shift is also going to have an impact on commercial real estate. With more people seeking less dense living arrangements, it means that there will need to be more hospitals, grocery stores, and offices in suburban areas to serve them.

The pandemic also highlighted the need for more hospital space, with impromptu care centers popping up in everything from convention centers to parks. George J. Kimmerle, head of the Kimmerle Group design firm, expects the number of suburban outposts for major city hospitals to double in the next few years -- including urgent care centers capable of handling all but the most intensive care cases.

Business owners may also be anticipating the cost of changes to floor plans and office design intended to reduce the spread of disease. As employees return to work, workers and employers alike have concerns about COVID-19 outbreaks and business shutdowns, and managers are scrambling to address them. While new construction would be ideal, retrofitting existing buildings with things like touchless work environments and indoor-outdoor spaces is much cheaper and less time-consuming. Given the amount of empty commercial space available on Long Island, coupled with its lower cost relative to New York City, it just makes sense.

An Uncertain Future

While the picture is overall optimistic for the Long Island commercial real estate market, some experts doubt that this future is guaranteed. Architect Mark Stumer, of Mojo Stumer, expects that, while residential real estate will continue to grow, the commercial market will experience a significant drop-off. The increase in employees working from home means that employers are likely to downsize their space as a cost-cutting measure, and real estate owners are likely to let them do it in order to avoid losing tenants. While some businesses may choose to either leave the city or expand onto Long Island, others may downsize and stay right where they are.

There has been much discussion of the way that the novel coronavirus has revealed issues with the way we live, work, and shop, from a shortage of ICU beds, to a lack of flexible teleworking accommodations for many employees, to the difficulty of effectively social distancing in factories. Real estate is only one of the areas impacted by this, but it's a major one. As hospitals seek to increase their reach, businesses downsize and leave the city, and urban residents look for greener pastures, COVID-19 has produced a major shift in what people want from their residential and commercial real estate.

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