The CARES Act took some steps toward addressing housing insecurity, but many of those benefits have expired or are set to expire. Unemployment subsidies, for instance, delayed the impact of unemployment on renters’ ability to pay. Since unemployment compensation benefits and eviction moratoriums have ended, defaults are likely, especially in low-income housing, unless Congress is able to negotiate a new relief plan. By comparison, median and higher-end properties in West Virginia do not appear to have been adversely affected to any significant degree as of the date of this article. For example, the largest multifamily complex in the Kanawha Valley was experiencing record occupancy numbers in July and the owner had seen no delinquencies.

The entire retail sector has also been adversely affected by COVID. Major retailers have shuttered stores and filed for bankruptcy protection. The surviving retailers and brand stores face a multitude of short- and long-term challenges. Supply chain, consumer demand, labor force, health and safety, and cash flow challenges abound. The new landscape for the retail sector is likely to include permanent changes in consumer behavior. For instance, many consumers pre-pandemic had turned to digital shopping. The pandemic accelerated the shift from foot traffic to e-traffic. Many Americans are even turning to e-commerce for groceries and other essentials.

COVID has changed the way many of us work. Some prognosticators have even gone so far as to ask if we need offices. A study by Venturebeat found that as many as 75% of employees prefer to work from home out of caution and/or convenience. A third of the workforce is now comprising millennials who value flexibility in when and how they work. Employees are also able to match some of the same technologies at home that were previously only found in the workspace. So long as workers’ productivity from home can match their productivity in the office, many businesses may look to downsize their office utilization to save on overhead costs.

Hospitality is among the hardest-hit sectors. The hotel industry has been affected by lengthy stay at home orders, an unwillingness to travel, and changes in company travel policies. A study by McKinsey and Company found that in early May, occupancy was less than 15% for luxury hotels and around 40% for economy hotels. They predicted that economy hotels would have the fastest return to pre-pandemic levels because they are better able to tap segments of demand that remain relatively healthy despite travel restrictions, such as long-haul trucking and extended stay guests. It also found that economy hotels, based on operating economics, can stay open at lower occupancy rates than upscale chains.

Looking Ahead

While CRE fundamentals saw an improvement in July, significant challenges for development projects and the CRE markets as a whole are likely to remain for more than a year, according to a COVID-19 impact report released by the NAIOP Commercial Real Estate Development Association. A great deal of uncertainty associated with COVID-19 remains, and we are likely to see long term changes in the structure of the CRE business. COVID-19 has affected the way public space is utilized and has resulted in a new normal. It is difficult to predict what the full impact will be on CRE, but there are certainly some changes we can anticipate.

At least in the short run, expect pressure on rents as they are negotiated and adjusted for commercial tenants who have experienced shortfalls due to mandated work stoppages. Although retail spaces are re-opening, expect them to experience decreased traffic for months. Hospitality will continue to see the effects of COVID-19 until Americans are permitted, and feel safe, to travel. Remote work may be here to stay, decreasing the need for office space. The use of virtual property tours will increase. Borrowers’ hesitancy to attend in face closings will likely remain.

West Virginia lenders face significant challenges in assessing the impact of COVID on CRE. Existing portfolios are being monitored closely, and new lending decisions involve increased scrutiny. Special Asset divisions may soon find themselves overwhelmed. Despite these challenges, CRE will recover and lenders that weather this storm effectively will find ways to effectively underwrite CRE opportunities in the near and long term.