Headlines citing rising delinquencies in commercial real estate have captured the attention of investors. Beneath the surface, however, there is much more to this than meets the eye. It should go without saying that some properties will fare better than others in the coming months, but importantly, it seems unlikely that there will be a fundamental shift in real estate markets going forward. Instead, the spread of COVID-19 looks set to accelerate trends that were already in place.

The past few years have seen a larger and larger share of the U.S. office transition to flexible office space, but two most penetrated and high-growth markets in the U.S.—San Francisco (4.0%) and Manhattan (3.6%)—have yet to reach the 6% level achieved in London and Shanghai. With COVID-19 forcing many employees to work from home, corporations will likely continue to gravitate away from traditional office space and embrace more flexible options. However, as employers potentially cut back on real estate spending, it seems unlikely this cash will make its way into the pockets of employees; rather, it will be used to ensure that the firm’s technological infrastructure is capable of handling a workforce which is no longer location constrained.

We also expect existing trends to accelerate in the industrial and retail sectors. The past few years have been dominated by an unstoppable rise in e-commerce as a share of total retail sales – this trend has emerged as a tailwind for industrial properties but a headwind for traditional retail. Within the industrial sector, demand for large and small warehouses looks set to increase as e-commerce grows as a share of retail spending. As a result, businesses will increasingly focus on housing inventory, as well as last-mile distribution.

Turning to retail, the bottom line is that the majority of malls no longer provide what consumers are looking for; those malls that have managed to keep their heads above water tend to have a more diversified mix of restaurants, grocery stores, and entertainment tenants. Looking ahead, it would make sense that retail properties continue to transition towards providing more and more consumer services.

In addition, retail properties may begin to look a bit more industrial, and function as e-commerce fulfillment centers given the combination of available space and close proximity to major population centers. That said, this type of transition would likely require the space to be rezoned for industrial use, the facility to be equipped with loading docks that do not disrupt the flow of traffic into the mall itself, and a renovation of the structure’s interior to process packages and inventory. Big box stores are generally better suited for this type of conversion than traditional malls, although we have seen some cases were existing buildings have been demolished and rebuilt.

On the residential front, the outlook is a bit mixed. Large, multi-family structures in urban areas may remain under pressure until COVID is resolved, and their ability to rebound will be a direct function of the health of the local labor market. In the interim, however, we have seen a renewed tailwind for construction activity in suburbia. This has led to a jump in housing starts and permits, as well as modest gains in construction employment; furthermore, with just under 5 months of supply available given the current pace of sales, it seems reasonable that housing activity broadly will well supported over the coming quarters.

There are plenty of questions around how real estate will evolve going forward, but the key thing to watch will be the state of the labor market. Real estate will be best supported in areas where jobs are being created; even if people do not return to the office full time, they will return to the office, and that will have impact the residential and retail sectors in due course. While this may not mean that new buildings need to be constructed, existing buildings will need to be renovated so that they are better able to fulfill their tenants’ needs. Bottom line – while the structure of real estate itself may be changing, the need for it is not going away.

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