The great transformation

It’s been a year since Virginia recorded its first COVID-19 case, and nearly all of us have embraced new ways of living — and working.

But with each passing day, a return to some semblance of normalcy feels closer to our reach. Even in the face of emerging coronavirus variants, there’s reason to be hopeful as a growing number of people receive their first vaccinations and begin to build all-important antibodies.

As more Virginians receive their second shots, business leaders are contemplating what the economic recovery will look like and how soon it will happen.

Last year marked the nation’s worst economic performance in 74 years, with the pandemic putting millions of Americans out of work and depressing spending and business investment. Coresight Research predicts as many as 10,000 retail stores could close during 2021, slightly higher than the record 9,832 closures it tracked in 2019.

When we reach the other side of the pandemic, who will be the economic winners and losers? Will we return to business as usual, or will segments of the economy be transformed forever?

As we brush off the dust and kick the tires of Virginia’s economic machine, will we be left with an old jalopy or a racing-red Lambo?

Taking it on the chin

What will Virginia’s economic recovery look like? It depends on which sectors you’re talking about.

Business trends that were already taking place prior to the pandemic — such as declines in brick-and-mortar retail outlets or an increase in remote working — have been greatly accelerated by the pandemic. And the segments of the economy that have struggled most during the pandemic also face the toughest roads to recovery.

Derek Klock, a professor of practice in finance at Virginia Tech’s Pamplin College of Business, says bluntly, “Commercial real estate has certainly taken it on the chin” during the pandemic.

“Retail establishments, restaurants, movie theaters [and] your average suburban shopping mall have quite literally been financially decimated. They have a tenth of the traffic they used to have — if they are in fact still in business,” he says, adding that while many mom-and-pop restaurants are gone forever, the survivors will likely experience a resurgence once more people feel safe dining inside restaurants.

According to an analysis of the latest U.S. Department of Labor national jobs report by the research firm Tourism Economics, leisure and hospitality account for 39% of the jobs that have been lost since February 2020 — three times more than any other industry.

Eric Terry, president of the Virginia Restaurant, Lodging & Travel Association, says more than 25% of Virginia’s restaurants have permanently closed because of the pandemic and that number will continue to rise. This spring, however, he’s hoping to see a rebound for restaurants due to “better weather and the fact that food employees are going to be in the next wave of the vaccine.”

Conditions aren’t as promising for brick-and-mortar retailers.

“This was probably the final death knell for malls,” Klock says. “Regardless of government oversight, Amazon has forever changed how we seek out anything we want to shop for.”

Rob Hargett, co-founder and principal at Richmond-based development company The Rebkee Co., says he’s unsure how many people will return to in-person shopping after becoming more comfortable with buying items online during the pandemic.

“I don’t believe any tenant’s projections or anybody’s predictions on where retail is going, particularly at the end of a pandemic,” says Hargett, whose company is currently redeveloping Regency Mall and the Virginia Center Commons properties, both in Henrico County. Regency, Central Virginia’s most upscale mall when it opened in 1975, is being reworked into a mixed-use development with shops, restaurants and apartments. Virginia Center Commons is also undergoing a conversion into a mixed-use development that will include an indoor sports and convocation center.

The uncertainty over brick-and-mortar retail is worrying to many small businesses. In a November 2020 poll from the U.S. Chamber of Commerce, half of small businesses reported they didn’t believe they could survive another year of recession before being forced to close their doors for good.

Office space

As for the commercial office market, Klock foresees a “very, very slow recovery” due to the fact that many employers, employees and clients have all become comfortable with working remotely.

Simply put, companies may require far less space if teleworking becomes a permanent fixture as a result of the pandemic.

According to Upwork’s December 2020 “Future of Workforce Pulse Report,” 36.2 million Americans will be working remotely by 2025, an 87% increase compared with the pre-pandemic level. At the time of the survey, Upwork said 41.8% of the American workforce was working remotely.

Some employers have permanently embraced remote working. In November, Mechanicsville-based Fortune 500 health care logistics firm Owens & Minor Inc. announced it was pulling the plug on its 90,000-square-foot call center in downtown Richmond and was seeking sublease tenants to fill the space. Due to the success of remote work during the pandemic, a spokeswoman said, the company has decided to follow that business model going forward for the call center.

On the other end of the spectrum, Washington, D.C.-based commercial real estate analytics and research firm CoStar Group purchased its downtown Richmond office building for $130 million in January and plans to construct another tower on vacant land next door. President and CEO Andrew Florance has said it needs the space for the company’s growth.

The D.C. region, including Northern Virginia, is facing some softness in its office market. According to commercial real estate advisory firm Newmark Group Inc., overall office market inventory rose slightly from 2019 to 2020, increasing from 368 million square feet to 369.5 million square feet; the vacancy rate rose from 15.9% to 16.9% in that same time frame.

Still, Nathan Edwards, senior director of research for metro D.C. at Cushman & Wakefield, says that Northern Virginia office space remains in a relatively good position. Office vacancy rates, Edwards says, are “probably the biggest indicator of the health of a market [and Northern Virginia rates] remain relatively in check in the COVID pandemic.”

Lisa Sturtevant, chief economist for Virginia Realtors, expects there will be an increase in vacant commercial office space in Virginia in the near future because companies and their employees have become more comfortable with remote work, but says it isn’t yet obvious because many businesses are locked into long-term leases.

In response to the pandemic, the real estate practice known as “blend and extend” is seeing widespread use, with landlords reducing rates in exchange for lease extensions from their commercial tenants. Some companies, including Maryland-based real estate investment trust JBG Smith, have reported being more flexible in an effort to meet their commercial tenants’ needs. “We are working with each tenant individually to craft tailored solutions to meet their near-term needs,” David Ritchey, executive vice president of JBG Smith, told Virginia Business earlier this year.

John Accordino, professor of urban and regional planning at Virginia Commonwealth University, also believes the pandemic may lead to a decrease in demand for office space.

“The same entities will be demanding space, but they won’t be demanding more space, or the space that they use will be less intensive use,” says Accordino. “If anything, this is going to result in a reduction in price. We’ll see not a wholesale fallout of the market, but we definitely are going to see a falloff, a reduction in price.”

Robert Taylor, executive director of VCU’s Kornblau Real Estate Program, says that the downtown office market in Virginia was strong before the pandemic, but companies may begin to question whether it could make more sense to relocate to suburban office spaces where they can pay less and be closer to suburban workers’ homes. With the extra space, companies also may find it easier to enforce social distancing, if necessary.

In Kornblau’s fall 2020 statewide real estate survey, respondents said they expected the real estate market — with the exception of malls and hospitality — to make a full recovery between 2021 and 2022. Most respondents expected post-pandemic demand for office space to decline, while 30% said they believed it would stay the same.

Though major metro markets like New York City may see an uptick in office space vacancies, Sturtevant is skeptical of an “exodus” taking place from Virginia’s cities. “While there may be some companies on the fringe that are doing this, I don’t know that we think that this is the end of the central business district,” she says.

The possibility of office vacancies does, however, raise the question of what that would do to city tax revenues. During the pandemic, suburban Chesterfield County saw an unexpected windfall of state sales tax collections as the number of people working from home rose an average of 12% in the last quarter of 2020 due to increased patronage of local businesses, Chesterfield County Administrator Joe Casey said in his December “State of the County” address.

Matt Huff, president at Roanoke’s Poe & Cronk Real Estate Group, says the commercial market in Roanoke has fared OK. Most tenants have renewed the same amount of space, he says, but have struck short-term extensions until they can figure out their next steps following the pandemic.

“They haven’t abandoned their office space,” Huff says. “They feel like there will be a need for it and they want to keep it.”

Remote workforce

With many white-collar workers embracing remote work, access to broadband has become more important than ever. Since the pandemic hit, the state has worked to expand broadband access to hundreds of thousands of Virginians through the Virginia Telecommunication Initiative. According to data from BroadbandNow, approximately 697,000 Virginians do not have access to high-speed wired internet and another 306,000 don’t have access to any wired internet options.

“The pandemic has brought a lot more people around to a view [that] access to the internet is an equity issue,” says Evan Feinman, chief broadband adviser to Gov. Ralph Northam. “We owe it to every Virginian to find a way to get them online and live a full and modern life.”

With remote work likely to be on the rise following the pandemic, Accordino says, downtown areas may see fewer office workers frequenting local businesses.

Jaime Clark, marketing and communications manager for the community booster nonprofit Downtown Roanoke Inc., says that the migration to remote work has had a major negative impact on Star City’s downtown businesses. Though her organization has worked to help small, locally owned businesses in downtown Roanoke, some have closed, likely from the lack of foot traffic caused by the pandemic, she says. Many longstanding Roanoke establishments have embraced e-commerce and social media to retain business, she says.

However, Sturtevant says the increase in remote work may prove to be a boon for smaller cities and rural localities where people can enjoy a higher quality of life at lower cost, especially with the expansion of broadband.

That’s the hope of Pulaski County Administrator Jonathan Sweet. During the pandemic, Pulaski has worked to expand broadband access, both for current residents and in the hopes of attracting new ones.

“With the decentralization of the back office, we think there’s going to be a demand for places like Pulaski County with proximity to higher education, with low cost of living and low cost of doing business [and] with a ton of outdoor amenities,” Sweet says.

Hard times for hotels

Another industry that may be fundamentally reshaped by the pandemic and the rise of Zoom meetings is the hotel and hospitality industry. Terry says industry experts believe a full recovery won’t arrive until 2023. He points to Chester-based Shamin Hotels’ Hilton Richmond Hotel and Spa in Short Pump, which went into receivership early this year due to the pandemic-caused decline in bookings, as a sign of things to come.

Shamin is just one example among many of how the industry has been severely harmed over the last year. In June 2020, McLean-based Hilton Worldwide Holdings Inc. cut more than 21% of its global workforce in response to the decline in business it saw amid the pandemic. Its third-quarter 2020 revenue totaled $933 million, a sharp decline from the $2.4 billion it reported for the same quarter a year earlier.

In some parts of the state, hotels have been repurposed as apartments. Last October, for example, Sunburst Hospitality won approval to convert the 187-unit Arlington Suites Hotel into one- or two-bedroom apartments or condos. The hotel saw its occupancy drop to 20% amid the pandemic.

Klock believes that overnight business travel will be permanently altered by the pandemic because of companies’ newfound abilities to hold online meetings, and that hotels will have to adjust to the new normal. For some hotels, a drop in corporate travel will mean closures. Hotels will need to look at ways to increase their occupancy, Klock says, by means other than cutting room rates. Some may cut services, such as room service, spas and pools. Others may move to an extended-stay model.

However, Klock says that we’re likely to see a return of in-person conferences and conventions because of their social importance.

“I never went to conferences for my continuing education,” Klock says. “I went there to see people that I only see at conferences, to gather with my fellow professionals and swap war stories.”

Marty Malloy, co-owner of Henrico County-based Convention Connections Inc., a company that oversees more than 50 conventions across the country each year, says the pandemic’s economic impact has been brutal for his company, but he expects business will pick back up on the other side of the pandemic.

“It wiped us out,” says Malloy. “I’m very positive and bullish long-term with our client base. They really want to get together and meet, and I think there’s a massive built-up demand.”

The Roaring Twenties?

Stephen Moret, president and CEO of the Virginia Economic Development Partnership, says Virginia will be in a relatively good position after the pandemic, and that the recovery may improve the state’s overall standing in employment growth.

“Virginia has done a lot better than most states,” Moret says, noting that much of the commonwealth’s economy is tied to the federal government, which has not seen significant job losses, and that Virginia has an unusually high percentage of professional office jobs, which haven’t been as dramatically impacted by the pandemic downturn.

According to Moody’s Analytics, Virginia’s economy should be back to full strength by mid-2022; still, Moret warns that rural and suburban localities may take longer to recover. A February Congressional Budget Office report projected that the economy would be largely recovered by mid-2021, but the nation will not see a return to post-pandemic employment numbers until 2024.

One of the biggest changes Moret sees is the digitization of business, a boon for Virginia both because of the commonwealth’s wealth of tech businesses and because Virginia’s quality of life makes it an attractive place to live for remote workers. Already, there are examples of companies embracing remote work long-term. Reston-based software company ScienceLogic says it will prioritize talent over geography as it hires about 150 people for remote positions in the coming year.

The pandemic has also sparked explosive growth in data centers and cloud services. Loudoun Economic Development Executive Director Buddy Rizer says the pandemic has been a “game changer” for accelerating the need for data. Loudoun hosts the largest concentration of data centers in the world, and Rizer says the 6.5 million square feet of new data center space the county added in 2020 eclipsed its previous banner year of 2018, when it added 5.5 million square feet.

“Honestly, I didn’t think we’d ever match it, but the pandemic has increased demand so much,” Rizer says. “The pandemic has really just blown up the digital economy.”

With the rise in online shopping, the demand for distribution centers and warehouses has also gone through the roof. Estes Forwarding Worldwide, Amazon.com Inc. and DHL Supply Chain all either established or expanded warehouse space in Virginia since the pandemic.

COVID-19 has also served as a catalyst for pharma in Virginia. Last year, Richmond-based Phlow Corp. was awarded a four-year, $354 million federal contract to establish a U.S. supply chain for the production of drugs and ingredients. In January, Utah-based pharmaceutical manufacturer Civica Inc. announced plans to invest $124.5 million to establish its North American manufacturing headquarters operation in Petersburg, and other developments are on the horizon.

While many industries and ways of working will undoubtedly change due to the pandemic, Sturtevant says that at heart we are creatures of habit. After the pandemic, she says, people will likely return to leisure activities they enjoyed previously — including dining at restaurants and traveling — adding that there’s pent-up demand for activities like these. Personal savings, she notes, have reached an all-time high during the pandemic, and consumers are itching to spend.   

“I don’t think we as human beings change our behavior very often or very quick,” says Sturtevant. “We’re so eager to return to normalcy that we’re going to see a lot of the same patterns that we saw before COVID.”

Klock sees a bright post-pandemic future, noting that the 1918 pandemic was followed by the Roaring Twenties.

The COVID-19 pandemic “will force a new wave of innovation in manufacturing, in energy distribution, in technology in general, in business productivity [and] that really spurs some exciting growth,” Klock says.

Still, he strikes a note of caution predicting when we’ll be out of the woods.

“While there is light at the end of the tunnel, it is still a ways off,” says Klock, who worries that the pandemic could see a resurgence this year due to social distancing fatigue. “One of my biggest fears is that people become overly comfortable too quickly with the vaccine doing its job and abandon doing protective posture.”

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