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Commercial Real Estate—Is the Future Now?
March 1, 2021
Stefan M. Calos
Sands Anderson PC
Richmond, Virginia
George Allen, the former coach of the Washington Football Team (then known as something else), lived by the mantra “the future is now.” He was intolerant of coaches and team owners who subscribed to “five-year plans.” One commentator derided the philosophy of acquiring experienced players who could help the team win immediately, by trading draft picks to other teams, as “mortgaging the future.”
Coach Allen’s approach worked, for a while at least. He quickly led Washington to its first Super Bowl, and enjoyed winning seasons every year. But Coach Allen never duplicated his early success in Washington. Decades later, debate about his “the future is now” philosophy continues in the DC area.
While “mortgaging the future” was considered a bad thing by some who analyzed Coach Allen’s career, mortgaging real estate is one of the things investors and developers do to acquire and maintain property that allows them to obtain positive returns.
In commercial real estate, a mortgage (deed of trust in Virginia) can provide the best of both worlds—allowing investors and developers to benefit now and in the future.
But what happens when the world suddenly turns upside down?
One day, we have the greatest economy in history. It’s a landlord’s market. Commercial spaces are at or near capacity with offices, restaurants, and other tenants. Then, a 100-year pandemic strikes. Everyone who can, works from home. Restaurants are shut down by the government or by supply and (lack of) demand. Downtowns and malls are veritable ghost towns.
Vaccines have begun to reveal a light at the end of the tunnel, but commercial office, restaurant, and other spaces, might never be the same. Employers and employees have learned that working from home can be as productive as working in the office. Restauranteurs and their clientele have learned to like carry-out and delivery options. Retail’s online presence has only grown stronger. And legislatures increasingly consider bills to benefit tenants over landlords, and debtors over creditors.
No one knows if pre-pandemic usage and demand will return this year, next year, in Coach Allen’s seemingly-infinite five years, or ever. Maybe the future of commercial real estate is now.
Either way, investors and developers would be wise to consider alternatives for their properties. When office leases are ready for renewal, tenants might seek space reductions like never before. And other tenants might vacate altogether.
But viable options exist for landlords. Entrepreneur magazine reports, for example, that historic access to real estate has created an environment extremely favorable to franchise growth, and that shifting social and cultural norms will create opportunities for new concepts to expand quickly in the months to come. Entrepreneur predicts that qualified, financed franchisees will be “appearing in droves” seeking real estate for franchise expansion.