Reimagining Real Estate for the Pandemic and After

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Musicians who need cash may comb through their belongings looking for something other than their instrument and music equipment that they can sell. Some musicians have found the answer to their cash shortage through music royalties.

Composers may have the right to royalties for sheet music sales. Composers also have public performance rights when their music is performed or played publicly. Performers may have contracts that give them royalties when their performances are streamed. Musicians also may receive royalties when their work is used commercially, such as in a television advertisement.

Royalties may provide a musician with a steady stream of income. But they aren’t something the musician can sell on Craig’s List.

Enter royalty funds. These funds use investor money to buy musicians’ royalty rights. Struggling musicians receive much-needed cash, which they may need to keep their careers alive. And established musicians can gain financial stability by selling royalties.

Although musicians may give up the opportunity for future income from the royalties, musicians also can reduce the risk of royalties drying up. And musicians can diversify their investments, which likely otherwise would be nearly entirely “invested” in their royalties.

Fund investors hope that the fund’s investments will not only produce a steady income stream that increases as the musician’s popularity increases. Funds also are motivated to add value to their portfolios by promoting the musician’s work. That promotion might add value to royalties the musician retains, as well as the royalties owned by the fund.

During the pandemic, some real estate owners are struggling. Retail assets (other than essentials such as grocery, pharmacy, and gas stations) may experience reduced rental income as tenants go out of business. Demand for office space is declining, and needs are likely to change as companies embrace telecommuting. The hotel sector has been hit particularly hard, as travel and tourism all but vanished overnight, and business travel may never return to previous levels now that businesses have invested in high-quality virtual meeting technology.

Like musicians, who have sold royalties to survive and plan for their futures, real estate owners will need to reimagine how to use their properties. This article discusses how real estate owners can reimagine property use so they can thrive in the post-pandemic era.

Identify Underutilized Space

Owners should start by identifying underutilized space at their properties. The types of underutilization will vary depending upon the asset class, tenant mix, and geographic location.

Hotels might have closed their restaurants in favor of room service to facilitate social distancing. And hotel event space and parking facilities built to support large events will likely sit idle.

Shopping malls may have both empty anchor space and vacant storefronts. Food courts may remain closed, and parking lots and garages may be nearly empty. On the other hand, shopping centers may have bustling parking lots and need to be reconfigured to meet customers’ needs and companies like Door Dash, which pick up carry out from their favorite restaurants.

Demand for particular types of manufacturing space may actually increase as companies decrease dependence on foreign-made goods. Plus, some manufacturers may need to reconfigure plants so employees can socially distance while maintaining the same production level.

Senior housing expenses have escalated, and move-ins have slowed due to the pandemic. But the recession may have affected seniors’ ability to pay for assisted living. And those who can afford it may not want to move to a congregate care community due to the COVID-19 risk.

Temporary Repurposing

I recently looked at the list of sites where I could obtain state-required COVID-19 testing after out-of-state travel. One drive-up test site was in the parking garage of a struggling shopping mall, and another drive-up site was in the garage next to a now-shuttered Regal cinema.

Major cities have rented unused hotel space as temporary housing for first responders or National Guard. Others have rented hotel rooms to use as quarantine space. Although the rooms may rent at reduced rates, they help owners to pay fixed costs with limited variable costs due to reduced amenities.

The Wall Street Journal recently described temporary repurposing of shopping mall parking lots and unused parking garages. One property owner has built open-air stores where their tenants can conduct in-person, open-air business despite a government shutdown of indoor stores.

Online sellers and delivery companies have rented parking garages for use as temporary distribution centers. And some parking lots have been leased to delivery companies whose fleets have expanded due to online shopping.

Other owners have repurposed unused parking and garage space for entertainment. Parking lots also have become locations for drive-in bingo, where people can play from the safety of their cars. Consumers’ demand for locally grown foods and the need for social distancing have escalated the building of temporary, open-air farmer’s markets in parking lots. Even my fitness club has repurposed part of its parking area to create a covered, open-air location for socially-distanced, group fitness classes.

Some owners have transformed parking areas haunted houses in open-air tents for small, socially-distanced groups can enjoy a Halloween scare-fest. One vendor bragged huge profits from a drive-through Halloween experience. The holidays might bring a drive-through winter wonderland where children can visit Santa from the socially-distanced safety of their cars.

Long-Term Reimagining

Temporary repurposing may help owners in the short-run. But many real estate owners will need to reimagine the long-term use of their properties for the post-pandemic era.

As I discussed in How the Pandemic Will Change Multifamily Real Estate, apartment complexes will need to create space that appeals to individuals who telecommute. Multifamily owners also will need to change amenities to match post-pandemic tenant lifestyles, including multi-season outdoor areas, such as covered picnic areas or roof decks with heaters. Delivery lockers, such as Amazon Hub, might be expanded to include refrigerated lockers for grocery delivery. And tenants may want dedicated Zip Car or scooter rental areas or Uber or Lyft drop off and pickup locations.

Manufacturing buildings are already making permanent changes to protect workers. According to Food Engineering Magazine, after a catastrophic break-out of COVID-19 among meat plant workers, food plants are being re-engineered. Owners are reconfiguring entrances to allow for health screening, creating isolation areas for sick employees, and considering expansion options to address demand fluctuations without requiring employees to work physically close together.

As I discussed in How the Pandemic Will Change Office Leases, office building owners also will need to make changes to survive. High-touch entry systems (i.e., keys and passcards) will be replaced by keyless entry systems, which may include contract-tracing options. Open offices are a thing of the past, and as businesses develop virtual meeting capability, they won’t need conference rooms.

Unused office space and shared common areas can be repurposed to provide hoteling space–personal micro-workspace that telecommuting employees can rent to obtain privacy while staying close to home. And shared kitchen space may give way to mini-fridges and microwaves used by only one or a handful of offices to minimize contact.

Shopping mall owners may reimagine their property in a mixed-use development. Before the pandemic, one older mall owner transformed small boutique shops to micro-apartments for single tenants, allowing tenants to rely upon the mall’s retail stores, amenities, and restaurants for their needs. Another mall already planned to construct an apartment building in place of vacant department store anchor space. And the shopping mall near to me has been set to house a fitness club, possibly, with a swimming pool, at a former Sears anchor location.

Shopping center owners also will need to adapt space for expanded pickup and delivery services. Grocery stores may offer drive-throughs where shoppers can pick up items they have purchased online as many pharmacies do already.

Post-pandemic hotel, hospitality, and entertainment real estate is likely to look the most different from what we know. Movie theater visits will give way to streaming on wide-screen televisions at home. Unused theater space might become an immersive entertainment experience or esports location. Bowling alleys may create private, single-lane areas where a family can bowl and eat without contact with others.

The New York Times recently reported repurposing of struggling New York hotels as senior housing. This concept will expand to meet the demands of the aging Baby Boomer population. Hotel swimming pool and fitness center could provide exercise for active seniors or be available for physical therapy or other services. And event space may be repurposed as a movie theatre.

Restaurants may decline, but owners can convert space to ghost kitchens where food is prepared for delivery. The ghost kitchen industry is on the rise, and Uber founder Travis Kalanick recently acquired $130 million of property for that growing sector.

Remain Creative and Nimble

One thing is certain: real estate and real estate investments won’t disappear in the post-pandemic era. Real estate owners can’t outsource or move real estate–they can only reimagine how the real estate will be used.

Time will tell whether future real estate will look like The Jetsons, Futurama, or Star Trek. But real estate owners, operators, and investors who view the pandemic as an opportunity for growth will be part of real estate’s post-pandemic evolution.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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