Widespread COVID-19 closures began in early March, reaching their peak in late April. During this time, nearly every business shut their doors or reduced operational activity. As early summer reopenings occurred, the line between what could open versus what should remain closed started to blur. For real estate investors, trying to understand COVID-19 closures while owning and managing a property in an impacted sector can be frustrating. Here's why some businesses can stay open while others remain closed and how these decisions impact the real estate market as a whole.
National guidance, state choice
March 2020, the Department of Homeland Security issued a general guidance for essential services to help local governments determine which businesses could or should remain open during initial shutdowns. Essential services include businesses or jobs that help maintain the function of society, including but not necessarily limited to:
- medical and healthcare
- information technology systems
- food and agriculture
- transportation and logistics
- water and wastewater
- law enforcement
- public works
This national guidance was not mandated as a federal law; the right to enact it as a law remains with individual states or local governing jurisdiction. This is the reason certain states allowed nonessential businesses like hair salons, restaurants, or even entertainment venues to operate while others required them to be closed and the reason some districts allowed schools to reopen with face-to-face instruction versus virtual learning only. Even certain cities and counties can enact different rules from the state. Individual businesses also have the right to choose to close or stay open as long as they are following state and local laws.
Most states followed the general guidance in the first few months, with individual businesses closing initially and later loosening some restrictions as the pandemic continued. But certain states are just now loosening restrictions or providing new mandates that allow industries to reopen at limited capacity.
Brings the market down, or props business up
The individual laws by state are either bringing the market down on a micro or macro level or boosting it up. For example, hotels, bars, offices, mixed-retail, malls, and entertainment venues are some of the industries that have been impacted the most. Entertainment venues in particular, which have high overhead costs, depending on the state or local jurisdiction, may be able to reopen at 50% capacity or less. But that limited capacity may not cover the costs for operation, and thus it makes more sense to stay closed until they can return to normal operations.
Essential services, like grocery stores, pet stores, health services, and home improvement retailers, have done exceptionally well during the pandemic. Even restaurants have fared better than other retailers and businesses, although many are still struggling to survive. Being able to provide to-go service, curbside pickup, and now limited-capacity seating prevented many restaurants from having to shut their doors all together.
States that have had super strict mandates, like New York City, Seattle, or Portland, have are seeing residents flee the city. This is driving rental rates and occupancies down to record lows, while demand in suburban and more rural markets are soaring.
The ultimate goal is to reduce the spread of the virus while maintaining economic activity, a challenge that has proven to be very difficult. Business owners and landlords want to keep consumers, employees, and tenants safe but also operate their business profitability. Right now, a big part of whether your tenant or your own business can operate as you'd like depends on the city, county, or state it's located in.