Commercial Real Estate (CRE) is an exceptionally diverse sector. There are many product types, classes, geographies, financing strategies, and more. We anticipated seeing this pandemic impact assets in ways that are not the same as others throughout the industry.
Numerous industry associations have assembled authorities to address what to foresee from the sector in the short- and longer-term. Predicated on what we’re gathering, we’ve overviewed CRE asset classes during the COVID-19 crisis.
Multifamily investors, in particular, will be satisfied to see this segment of the industry remain stable. Read on for more.
· Hospitality: With international trips restricted, travel and tourism have been pulverized. Restaurants in the U.S. fight to endure amid the myriad of tight stipulations put in place in the wake of COVID-19. Even those that have transitioned to take-out and delivery are struggling to stay afloat. Some fear that the most profound behavioral development in restaurant commerce is the permanent shift to digital ordering and how that relates to an oversized ‘brick and mortar’ existence.
The impact is complete upheaval. Interruption is evidenced through reservation apps, point-of-sale systems, and other tech platforms that have definitively captured a comprehensive snapshot of the tectonic disruption in their databases — painting a quantifiable picture of just how much the novel coronavirus has warped American food culture in the last month. For example, The Cheesecake Factory furloughed 41k hourly employees because of partial closings at restaurants prompted by the COVID-19 pandemic.
There have been extensive hotel closings this past week. Marriott International has laid off tens of thousands of its employees, including corporate staff, for the first time in company history.
In New York, the Four Seasons is extending rooms free of charge to healthcare workers in need of a place to stay. Other hotels are being asked to assist as triage centers for hospitals. Others are housing the homeless to stanch the spread of coronavirus.
Experts say hospitality vacancy rates will likely drop into the single-digit range. As a consequence, hospitality deal flow is expected to be put on hold. This sector is essentially unfinanceable right now. How long these conditions last remains to be seen.
· Senior Housing: The COVID-19 outbreak at a Seattle-area nursing home has prompted senior housing activity to grind to a halt. The consequence of the pandemic has been felt in incomprehensible ways. Transactions with occupancy in place are doing okay for the moment, but absorption will continue to be low moving forward. The typical 45- to 64-year-old decisionmaker won’t be settling their parent into a facility right now, assuming they can bypass doing so. Experts prognosticate that this will produce an opportunity for best-in-class senior housing operators to buy struggling facilities at a discount, thereby ‘wedding’ or ‘weeding out’ some of the less established groups in the market.
· Retail: Retail remains a mixed bag. Grocery-anchored centers are performing well, as grocery store sales have skyrocketed in recent weeks, primarily via delivery apps. The numbers are monstrous and entirely off the meters. Traditional retail has collapsed. Lifestyle shopping centers, the beloved of retail in past years, are also being clobbered. These centers, which have repositioned themselves to concentrate more on experiential components, are abandoned now that folks have been asked to stay home.
It continues to be seen how lifestyle centers re-emerge and evolve out of this crisis: will people flood restaurants and experiential retail stores, after having been held up at home? Or will there be continuing unease about the economy, prompting some to curtail discretionary spending? Will delivery have the lions share of the market? Those are significant question marks.
· Office: This section of the market could behave in several distinct ways. Well-located office buildings, such as those placed downtown, may perform well – especially if they have long-term leases with creditworthy tenants who can swallow the short-term blows presented by this crisis.
Many of these office workers can remain working from home with little disruption. Employees want to be trusted and relish the work-life balance that some industries can afford. Yet this work from home stint may possess longer-term implications in the office market.
For instance, if staff grow accustomed to operating from home, employers may be less inclined to renew costly leases or sign on for extensions. Instead, they might increasingly empower and allow staff to work remotely. The best measure of remote productivity is outcomes and achievement, rather than activity.
Conversely, employees may encounter remote work fatigue, generating urgency to get back inside the office as swiftly as feasible. Meanwhile, Some co-working companies are troubled and in no condition to withstand the impact of COVID-19. This is a workstyle exercise that will unfold before our eyes.
· Industrial: Some types of industrial continue to function very well – especially last-mile distribution facilities. People don’t desire to leave their homes, so many have utilized online delivery services like Instacart and Amazon Prime. This has caused a massive spike in need for well-located logistics hubs. Meantime, more established industrial facilities, such as those required to serve the Port of Los Angeles, which has felt a drop off inactivity, are beginning to grapple. Lease-up of conventional industrial may lag for a while.
· Multifamily: Multifamily has long been a favorite of commercial real estate, and COVID-19 hasn’t altered that to any substantial degree. Fannie Mae and Freddie Mac are continuing to extend funding. Multifamily lenders are tripping over each other to get well-located deals done at some of the most competitive terms we’ve observed in the past decade. In terms of leasing, Class A may take a quick hit. Class A residents are prone to have greater mobility than others, so those looking for a more cost-effective living arrangements might downgrade to Class B assets in the short-term. As above-described, Class B properties are well positioned at this time. Class C properties are destined to struggle the most. These residents are the least expected to have resources, which could cause a significant disruption in cash flow if these residents are laid off or otherwise see their income reduced.
· Self-Storage: Experts frequently use the “Four D’s” to represent self-storage demand: downsizing, divorce, dislocation, and death. Regrettably, the COVID-19 crisis is likely to cause an uptick in this grouping. As before-mentioned, self-storage facilities are well-suited at this time. Self-storage REITs are performing particularly strong right now.
· Manufactured Housing: Manufactured housing frequently gets filed into other residential categories, but it deserves to be looked at on a standalone basis. Manufactured housing is amongst the most affordable in the U.S., with persistent interest. For a frame of reference: while hospitality and other publicly-traded REITs have come tumbling down over the past month, manufactured housing REITs have ticked up by 2-3% on average.
So, if you were to invest, where should you be spending? Is now a time to be picking up commercial property at a discount?
We don’t see extensive price modifications just yet. Commercial real estate is not like the stock market; it takes longer for price adjustments to be revealed in our sector. Yes, there could be opportunities for distressed deals in the future, but it is still too early to say. It’s a trend all investors should continue to monitor closely.