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A Current Worldwide View of Commercial Real Estate

7/20/2021 | Articles & Alerts, Real Estate Transactional, Zoning & Development

A few weeks ago, as a part of an international meeting of lawyers and accountants, I participated on an international panel discussing the future of commercial real estate law. The worldwide perspective was interesting and highly varied. Overwhelmingly, attorneys, accountants, and their clients continued to work from home. In parts of Europe, those trickling back to the office were informed that a new wave of shutdowns was likely and that they should return home. Aside from the obvious stresses of working from home, no one seemed to mind very much.

As for the future of commercial real estate, the circumstances were varied, and without any perceptible sense of what the future may hold. However, universally, there is both good news and bad news. Savvy investors have capital to employ and are actively searching for the best deals. The general consensus was that the retail industry will have the longest road to recovery. The decline in brick-and-mortar stores, already in progress due to online shopping, has been accelerated by the pandemic. This trend translates directly to burgeoning legal issues caused by increased vacancies in large retail malls. Internationally, all of my colleagues have seen a dramatic increase in lease modifications, financial restructurings, landlord-tenant litigation, tax appeals, and unfortunately, bankruptcies. However, smaller retail centers anchored by the dollar store, pharmacy, or supermarket, have been holding their own.

While internationally there is less demand for office space, this trend is driven more by general economic conditions than the pandemic itself. Office space is intrinsically linked to the economy. In a downturn, office demand drops off as employment levels fall, and corporate cash is conserved. While the pandemic has undoubtedly caused a global recession influencing short-term demand, the increase in working from home will not necessarily be the death knell for the office. Long-term office demand will depend upon the impacts of technology, new design improvements, commuting patterns, and quality-of-life issues. Office owners will need to invest in space reconfigurations and will likely need to offer concessions in the form of free rent or higher tenant improvements to entice tenants to enter into new leases or renewals. Retrofitting office space to adhere to local health and safety department guidelines may lead to greater differentiation between building classes and a flight to quality.

One interesting pattern that has emerged in the United States and not so elsewhere has been the proclivity of constitutional challenges to shutdown orders. In many states and some cities, governors and mayors have ordered the closure of businesses that serve large groups of the public, such as restaurants, bars, and entertainment venues. A significant number of these businesses will probably fail and never reopen. The legal authority to impose such closure orders is, in many instances absent. The question arises whether affected business owners might be entitled to compensation for government takings under the federal and state constitutions. Despite these constitutional questions, few courts have been willing to overturn closure orders of award compensation for the financial impacts of closures.

The pandemic has been another unforeseen extreme shock to our world with far-reaching consequences. Will a vaccine be the panacea for what ails the world, putting us back on the path to normalcy? The world is waiting for the answer.

For further information, please feel free to contact Neil A. Stein, Esquire at (610)941-2469 or nsteain@kaplaw.com.