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Current Impact of Covid-19 on the Delaware Commercial Real Estate Market

Articles & Publications

November 13, 2020
By: John H. Newcomer, Jr.
Real Estate Alert

The real estate industry in Delaware experienced dramatic changes over the past eight months resulting from the COVID-19 pandemic. Social distancing mandated by Governor Carney’s March 12, 2020 Declaration of a State of Emergency for the State of Delaware Due to a Public Health Threat, and the subsequent modifications thereto (collectively, the “Emergency Declaration”) significantly impacted the operation of commercial properties in Delaware. Many businesses could not operate at all when the Emergency Declaration initially took effect, and continued restrictions on capacity, coupled with the imposition of masking and cleaning requirements, still affect the bottom line of many businesses in Delaware.

Without a regular income stream, many commercial tenants cannot meet their monthly rent obligations. Facing diminished monthly rental income, some landlords are left with a cash shortfall that affects their ability to make mortgage payments to their banks. Local lenders appear willing to work with their customers to try to weather the financial storm created by the COVID-19 pandemic. Servicers of securitized loans, to the extent they return phone calls and messages, are often difficult to deal with, and present additional challenges for borrowers seeking interim financial relief. Even with accommodations from lenders, some businesses will not be able to survive for the duration of the restrictions put in place to deal with the health crisis facing our country.

HOSPITALITY

The hospitality and restaurant industry experienced the most severe impact from the COVID-19 pandemic. Hotels that remain open are operating at subpar occupancy rates that will likely continue well into 2021. The recent political activities at the Wilmington Riverfront helped boost the occupancy rates at some of the hotels in Wilmington. Restaurants continue to operate under capacity restrictions that reduce the number of customers that can be seated and served. With colder weather coming, the use of outdoor seating that provides some respite in the storm will soon be diminished, if not eliminated entirely. The continued push for customers to utilize take-out and delivery services will be an important part of restaurant survivals, although the continued drain on cash flows may spell trouble for this class of properties in the short term.

RETAIL

Retail properties are in a somewhat better position, but still face challenges. Although many stores were closed for several months, almost all are now re-opened. Customer traffic is still down, due to capacity limits and the fear of gathering in public, so just how long tenants can survive with the lowered revenues is an open question. The bankruptcy of well-known store brands such as Neiman Marcus, J.C. Penney and Brooks Brothers, just to name a few, acts as a drain on many malls and shopping centers across the country. Unfortunately for brick-and-mortar retail, the pandemic accelerated the already growing popularity of online shopping, and will cause further downward pressure on traditional retail properties.

OFFICE

The office market in Delaware remains generally at pre-COVID levels – at least in the short term. We will not learn for some time the long term impact of people discovering they can work from home just as effectively as they can sitting in an office building. If this change takes hold, it will have devastating consequences for the office market in the long term. It will also negatively impact the wage tax revenues of cities such as Wilmington, if employees no longer drive into the Central Business District each day to go to work. Counseling against this shift to work-at-home arrangements is the loss of culture and combined creativity that can only be achieved through a collaborative work environment. Some may argue that Zoom and other virtual platforms provide this type of connection. I, for one, am not convinced that continued social separation is good for business, or the mental health of workers. For many organizations, personal connection and caring for one another is the hallmark of their culture.

INDUSTRIAL

One bright spot in the commercial property arena is the industrial and warehouse market. New logistics facilities seem to be popping up everywhere in Delaware. The largest building in the State, currently under construction, will be a new Amazon fulfillment center at the site of the former GM Plant on Boxwood Road, just outside of Newport. As online shopping continues to grow in popularity, the need for logistics facilities will grow right along with it.

WHAT TO EXPECT

For many sectors of the commercial real estate market in Delaware, the worst may not yet be over. Restaurants are likely to experience further loss of business as the cold weather sets in, and the uptick in new COVID-19 cases may result in further capacity limitations. With rising infection rates, hotels will also likely see reduced demand for travel and lodging. Although the holiday shopping season will provide a boost to retail shopping, continued restrictions into the New Year could cause further losses that retailers are no longer able to endure. Unless there is further federal stimulus money provided, the “dark winter” predicted by our President Elect may be just that for the hospitality and retail real estate markets in Delaware. The future of the office market remains uncertain, although the return to normalcy after the wide-spread distribution of a vaccine may temper those concerns. In the end, when the COVID-19 virus is finally eliminated, or at least reduced to smaller percentages of our population, the commercial real estate market in Delaware should rebound. Businesses will likely benefit from the pent up demand that social isolation has caused over the last eight months. The short term view may still seem bleak to some, but in the long term, COVID-19 will hopefully become just a blip on the radar screen.

If you have questions or would like more information, please contact John Newcomer (jnewcomer@morrisjames.com; 302.888.6975).

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