The Coronavirus pandemic is an unprecedented event in our history. For commercial real estate investors, property owners, and property managers, the virus represents significant and unique challenges.
Here, we are examining the impacts COVID-19 has had on the CRE industry thus far. Then, we look forward to projections for the second half of 2020 and beyond. Finally, we highlight commercial real estate investment opportunities revealed by the pandemic.
- Coronavirus and Commercial Real Estate: The Statistics
- Coronavirus and the Impacts on Commercial Real Estate
- COVID-19 and Real Estate Construction
- Hardest Hit Commercial Real Estate Industries
- How Real Estate Investors and Professionals Can Navigate This Crisis
- Potential Long-Lasting Impacts on the CRE Market
- Economist Forecast for the Remainder of 2020
- Opportunities in Light of the Pandemic
- Coronavirus and Commercial Real Estate
More than halfway through 2020, the commercial real estate market continues to experience the fallout of COVID-19 shutdowns. Even as some areas are slowly returning to normal, the damage is already done. Unemployment continues to plague many parts of the nation. Businesses struggle to stay afloat as customers hesitate to go out.
We’ve seen unprecedented economic impacts as the novel Coronavirus tore through Asia and Europe, and then landed in the United States.
Quarter 2 Impact
As of August 15, here’s where we stand:
- 2% unemployment rate (July reports)
- 9% decrease in GDP, Q2 2020 – the worst in modern history
- 6% dip in consumer spending in Q2 2020.
- 9% overall economic contraction during Q2 2020
- CRE transactions down 5% globally year over year; down 69.5% in the Americas
To say it’s been a difficult year for commercial real estate would be an understatement. A decimated hotel industry. Hotels are empty. Businesses are struggling to keep afloat. Multifamily tenants fear evictions in the weeks ahead.
As the dominos continue to fall, impacts for commercial real estate investors and property managers are yet unknown. However, there is still reason to be hopeful. Some real estate sectors show promise of a quick rebound, and investors are prepared to jump.
In the second quarter of 2020, commercial real estate felt the impacts of Coronavirus shutdowns – just like most other sectors of the U.S. economy. However, geographic location and type of real estate seemed to determine the severity of the virus’s impact.
Has the multifamily sector seen significant impacts from the Coronavirus shutdowns? Well, yes and no.
Depending on the location of the property, some properties fared far better than others. For instance, there are some indications that multifamily tenants living in busy cities are leaving, moving to homes outside busy metropolitan areas.
In Manhattan, one of the highest concentrations of multifamily properties in the nation, there are 13,000 empty apartments as of August. That’s the highest vacancy rate the city has seen in 14 years of keeping data. With New York City still struggling from the effects of the pandemic, many city-dwellers left the Big Apple, choosing to move to less populated – and less expensive – neighborhoods.
Even now that the city has its COVID numbers largely under control, Manhattan struggles to regain a sense of normalcy. It could be years before the economy rebounds and people begin leasing Manhattan multifamily homes again.
The Exodus to the Suburbs
It’s not just Manhattan experiencing this downward trend in property leases. Vacancy rates are up in cities across the nation. The exodus out of the cities and into suburban and rural areas has several root causes.
First, as the pandemic spreads through close contact with an infected person, more and more apartment-dwellers are leaving their cramped shared spaces in favor of seemingly safer single-family homes. Suddenly, amid a health crisis, the thought of riding an elevator several floors to an apartment building seems riskier than it ever has before.
Secondly, as the economy constricted, the Federal Reserve lowered interest rates. In turn, many mortgage lenders lowered their rates, making homeownership more affordable for many families. Pair those low-interest rates with a strong desire to leave downtown condos, and the demand for suburban homes has been booming.
Finally, COVID-19 changed the way America’s office workers do their jobs. Since March, many businesses have allowed employees to work from home. Many don’t intend to return to in-office work environments for at least several months. It’s likely many employees will work remotely at least some of the time for the foreseeable future. Therefore, many Americans need more space to set up home offices, leading them to purchase larger homes in the suburbs or rural areas, where homes are more affordable and readily available.
Multifamily Concerns: Impending Evictions
Another major concern for multifamily property owners are the looming missed payments and subsequent evictions. As the Coronavirus began ravaging the national economy back in March, landlords watched and waited as more and more tenants missed rent payments.
Thankfully, Congress passed several protections that shielded both tenants and property owners against significant financial hardship. On March 27, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This economic relief package provided swift financial relief for nearly all American adults, with more than $2 trillion routed to small businesses and American families.
In addition, the CARES Act also shielded American renters and homeowners from eviction. However, those protections expired with the CARES Act – on July 24 – and those protections have not been reinstated. Congress deadlocked on CARES Act extensions, and with no agreement in sight, millions of Americans are now facing potentially devastating economic consequences.
Eviction Moratorium Expiring
Without a bipartisan agreement from Congress, the eviction moratorium established under the CARES Act will expire on August 24. Consequently, multifamily property owners and property managers will once again be allowed to evict tenants for nonpayment.
Just as eviction moratoriums expire, the more than 30 million unemployed American workers will also lose the $600 weekly additional unemployment payments outlined under the initial Act. While the President recently signed an Executive Order allowing $400 weekly payments to continue, the financial blow means more American families will have trouble paying their rent in September.
And while the President signed an Executive Order indicating eviction moratoriums would continue, the order’s text doesn’t explicitly protect evictions. Instead, it states:
“The Secretary of Health and Human Services and the Director of CDC shall consider whether any measures temporarily halting residential evictions of any tenants for failure to pay rent are reasonably necessary to prevent the further spread of COVID-19 from one State or possession into any other State or possession.”
That is, the order wasn’t to stop evictions, but to direct others to consider stopping evictions.
Translation: landlords have full authority to start the eviction process if tenants miss their September payments.
With the pandemic continuing to ravage our economy, and millions still out of work, evictions will become commonplace in the coming months. Some indicators suggest more than 40 million Americans will be displaced over the next year.
Of course, these evictions won’t just impact the tenants but also the property owners and property managers who oversee these locations. As a result, commercial real estate – specifically the multifamily sector – could face significant hardship in the months ahead.
Some states have instituted eviction moratoriums locally, but those certainly aren’t widespread across the nation. And many of those have either already expired, or will expire shortly. Therefore, tenants face a terrifying reality: either pay up or move out.
Owner and Landlord Impacts
Commercial real estate property owners and multifamily property managers have been struggling during the pandemic, too. Owners with Freddie Mac or Fannie May-backed mortgages may have forbearance agreements that protect their businesses. That is, owners may qualify for up to 24 months of protections against missed or incomplete mortgage payments.
As more tenants miss rent payments, owners struggle to pay the mortgage on their multifamily properties. These forbearance agreements protect landlords against foreclosure, which would ultimately impact not only the investors but also the property management team and the tenants living on the property.
It’s not yet sure if lenders will extend those protections if the Coronavirus pandemic continues.
The one bright light for commercial real estate investors and property managers during this pandemic is the industrial market boom.
As e-commerce becomes more widespread and commonplace, businesses and manufacturers are looking for space to store inventory and create more products.
Increased Domestic Manufacturing
One factor driving the industrial real estate market is the need for domestic manufacturing. COVID-19 interrupted supply chains throughout the world. As such, American businesses that relied on offshore production experienced significant shipping delays. Consequently, their profit margins suffered, too.
Now, businesses are turning their focus to American manufacturing, skipping the overseas middleman. By producing products locally, these businesses will create more American jobs. They will allow products to go directly from the factory to shopping carts (both in-person and online) faster than ever before.
E-Commerce and the Demand for Warehouse Space
The Coronavirus pandemic has completely changed the way Americans live, work, and shop. As more consumers purchase everyday goods online, manufacturers and small businesses have moved their stores online.
All that inventory needs to go somewhere. And with brick and mortar stores shuttered or seeing low volumes of sales, the demand for storage facilities and warehouses has skyrocketed.
One report suggests that retailers may need an additional 1 billion square feet of warehouse space by 2025. That’s excellent news for commercial real estate investors who are looking to minimize losses from other real estate types.
Already, the industrial market is seeing upticks in activity. Land zoned industrial is expected to increase by about 1% in Q3.
Coronavirus has impacted the retail sector more than any other commercial real estate type. Retail centers closed as the virus moved through the country, and many haven’t recovered, even as the nation slowly reopens.
Some projections indicate a nearly 53% contraction in the GDP in the second quarter of 2020. Those losses have devastated many retail businesses. AS a result, many now face bankruptcy or outright insolvency.
The 20 largest bankruptcies all include $1 billion or more in liabilities each. In fact, many economists say it’s an “unprecedented” decline for retail businesses across the country. Restaurant companies lead the way in bankruptcy filings, with more than 530 reported by the end of June. Retail companies, transportation companies, and travel-related businesses also top the list of filers.
Continuing a Downward Trend
Retail real estate was on a downward slope long before Coronavirus hit. Even in pre-COVID days, the rise of e-commerce meant empty brick and mortar retail centers.
Now, with more retailers than ever conducting business online due to the virus, those losses seem to be accelerating. Even with the relief offered by the CARES Act, many retailers now face significant losses in Q1 and Q2. And the rest of 2020 isn’t looking great, either.
Shopping Mall Investments
While brick and mortar shopping centers have been struggling for some time, it seems the Coronavirus may speed up their inevitable decline.
In particular, shopping malls will look much different post-pandemic. As anchor retailers like JC Penney permanently close stores across the country, shopping malls scramble to find financial solutions. Online retail giant Amazon may prove the unlikely solution. In the wake of many malls struggling to survive, Amazon is in talks to turn anchor store spaces into Amazon fulfillment centers.
Other solutions include turning anchor store spaces into entertainment zones, aquariums, and other attractions to hopefully draw in business and save these retail centers.
Retail Commercial Real Estate and the Impact on REITs
While retail real estate has been struggling in recent years, the Coronavirus pandemic amplified these woes. But individual investors aren’t the only ones impacted by the decline in brick and mortar retail sales.
Many shopping malls and shopping centers are owned by real estate investment trusts, or REITs. In essence, these trusts allow multiple investors to purchase a portion of the property, receiving dividends based on interest rates, rate of return, or other indicators.
However, with shopping malls and other retail centers struggling, REITs are feeling the impacts, too. Thankfully, many REITs have diversified their investments, moving away from retail-only shopping towards a community model, including restaurants, data centers, and the like.
Because of these diversified investments, many REITs have enough cash on hand – or access to credit – to continue posting gains. Also, these REITs can provide rent relief and other financial considerations for business tenants, helping retail centers avoid catastrophic defaults and devastating economic fallouts.
The office sector is facing significant impacts because of the Coronavirus as well. As the virus moved through large cities, office buildings closed down, and employees moved to at-home offices.
Even now, with many offices reopening, employees continue to work from home. With businesses looking to cut costs amid the pandemic, will these companies downsize in the future, allowing telework to become the new normal?
Continuing to Work from Home
Initially, home offices were a necessity. If businesses hoped to maintain their economic momentum during a pandemic, they would have to find ways to keep employees and clients connected.
In mid-March, as COVID-19 began taking hold in the United States, 67% of employers were taking steps to let their employees work from home, according to one survey.
In those first months, many businesses, employees, and commercial real estate owners and property managers thought teleworking would be a temporary solution.
However, as weeks turned into months, many businesses are embracing telework as the new normal – and a solution to financial woes.
Reasons to Stay Home
A recent Stanford study found that 42% of Americans are now working from home full-time. And many businesses are encouraging their employees to stay at home for the foreseeable future.
There are several reasons for this shift towards telework.
First, employers want to protect the health of their employees and clients. With the virus continuing to impact many parts of the country, many workers simply don’t feel safe returning to a large office. The past few months have proven that employees can be productive from home, so there’s no rush to fill offices with employees, property management staff, and customers.
Secondly, businesses are feeling the financial impacts of the Coronavirus as well. Nearly every industry in the world is trying to cut economic corners. For companies that have experienced significant losses during Q1 and Q2, moving employees out of offices has economic value. If businesses can renegotiate office leases, or downsize to smaller properties, they can save substantial sums each month.
Allowing employees to stay home doesn’t just make sense from a health perspective, but from a financial perspective as well.
The Impact to Office Property Investors and Property Managers
Of course, the rise of teleworking doesn’t exactly profit the property investor or property manager. As more businesses downsize from large downtown offices, the commercial real estate sector is likely to experience more losses than ever.
The answer likely lies in our ability to adapt to ever-changing times and create an environment where business owners and employees feel safe and comfortable.
Reimagining Office Space
Before COVID-19 impacted our lives, office properties were trending towards more open-concept spaces, co-working offices, and dense populations.
However, COVID-19 encourages distance and compartmentalization. Because of this, property managers are reimagining the way offices look and operate.
To open safely, office buildings must pay close attention to their population density, spacing, and layout. Instead of wide-open offices that encourage collaboration, employees can expect physical barriers between workstations and less personal interaction. Rather than keeping co-working spaces open, property owners may consider renovating these spaces to create divisions between renters.
Finally, some office property managers are reconsidering traditional office space altogether. Make use of vacant office space, allowing current tenants to expand into these areas to maintain proper social distance. Not only will this allow your tenant to continue working during this pandemic, but it can also offset lost revenue due to increased vacancy rates.
Maintaining a Healthy Office Space
In order to continue working efficiently, businesses and employees must feel safe returning to the office.
The novel Coronavirus is anything but eradicated. As such, many businesses continue allowing employees to work from home offices. However, as research helps us understand the virus and how to prevent infection, some offices are slowly reopening.
For property owners and property managers, creating and maintaining a healthy work environment is key to getting tenants back in the building. For many property managers, this means implementing strict hygiene procedures, increasing sanitation practices, and investing in air purification systems to maximize protection.
Find a COVID-19 readiness checklist HERE, designed specifically for commercial real estate property managers and maintenance professionals.
As more businesses allow employees to work from home, and therefore decrease the need for traditional office space, the sublease is becoming more popular.
In a sublease, the current tenant leases out all or part of their existing office space to another tenant, helping pay the total lease to the property owner. The initial lease contract should outline sublease terms and conditions.
A sublease can be a great way for struggling tenants to continue their lease contracts and pay the landlord, even if they cannot afford the lease themselves. As a landlord, allowing a tenant to sublease can ensure you continue to receive payment on a property.
Moving forward, if landlords and property owners cannot secure ongoing protections from Congress and other financial bailouts, subleasing may be the only way to salvage the investment.
Outlook for Office Commercial Real Estate
Even amidst these considerations – creating a healthy workspace environment and repurposing usable space – the office sector will likely see a downturn in the coming months.
Because of the pandemic, more employees than ever are working from home. Zoom calls and Microsoft Teams have replaced in-person meetings and office collaboration. And while these virtual workspaces felt uncomfortable at first, many businesses are now seeing the positive impacts of working from home.
Some experts believe the office sector will continue to experience economic impacts long into the future. That’s because, as CEOs look for ways to trim the budget in the wake of the pandemic, unnecessary office space could be the first to go.
Increasing Vacancy Rates
As contracts expire, more businesses are likely to either downsize significantly or forego the traditional office altogether. Until the world returns to normal (whenever that might be), office buildings can expect far greater vacancies as employees continue working from home, businesses reduce occupancy, and some companies go out of business altogether.
Reports for Q2 found negative absorption on par with the 2009 economic crisis. Second quarter office leases were down 44% year over year, and vacancies rose 13% nationwide. Subleases increased to their highest levels since 2010, now making up about 2.7% of all usable space.
If the predictions are to be believed, office investments could see negative rates of return for investors for quite some time.
COVID-19 and Real Estate Construction
Over the past decade, we’ve witnessed a remarkable surge in commercial real estate construction nationwide. Since 2009, the U.S. has experienced expansion both in new builds and employment opportunities every year. The uptick in commercial construction continued even after a trade war with China increased building material costs.
However, despite continued growth in the first quarter of 2020, the Coronavirus had a devastating impact on the commercial construction industry.
Construction all but ceased in April as nearly every sector of American life shut down. Coastal areas, namely New York and Seattle, saw the most significant impacts as COVID-19 spread rapidly. These local governments enacted strict health and safety precautions for construction crews, leading to substantial delays.
In addition, an already devastated Asia and Europe caused major disruptions in the supply chain. Affordable building materials from these areas either weren’t being manufactured or couldn’t be shipped to the U.S. safely. Therefore, builders faced a choice: either wait for materials to arrive, use expensive domestic products, or shut down construction.
As coastal cities faced construction slowdowns, many areas in the center of the country continued to work on CRE construction projects. However, as the virus continued to spread, builders were forced to create plans that would mitigate the risk to employees.
As a result, construction sites changed dramatically. Many locations across the nation shut down in the face of Coronavirus. Those who continued to work faced strict protocols designed to keep workers and staff healthy.
Even now, with many projects restarting and nearing completion, safety measures create delays.
Hardest Hit Commercial Real Estate Industries
It seems no one has escaped the reach of Coronavirus. However, the virus and its impacts have affected some commercial real estate sectors more than others.
Proximity Determines Impact
As a general rule of thumb, CRE sectors that encourage community and close proximity have seen the worst impact. COVID-19 spreads fastest when people are close to one another. Therefore, shopping malls, hotels, office buildings, restaurants, healthcare facilities, and other social spaces have faced the strictest government regulations during the pandemic.
Landlords In Trouble
When businesses don’t get customers, they can’t pay rent. And while that’s terrible for the business owners and their employees and customers, it’s downright devastating to landlords and CRE investors. In May, nearly 20% of hotel property investors were more than 30 days late on paying their loans. Ten percent of retail properties had missed payments, and 2% of office landlords were past due on their mortgages.
For investors and landlords, lost rent can have a devastating impact on their overall rate of return. Without monthly rent payments, these investors can’t pay their debts to lenders. Soon, these landlords will face foreclosure, leading to an even greater economic collapse.
The tourism industry faces perhaps the most significant impact. Research suggests that hotel and other lodging investors and landlords will face increasing difficulties in the months ahead.
While Congress did approve some measures to rescue investors and property owners, these considerations aren’t all-encompassing. Without more financial assistance, many investors and property owners face an uncertain economic future.
The Bright Spot for CRE Investors
While many retail and office sectors are experiencing hardship, the news isn’t all doom and gloom.
The industrial sector, particularly warehouses, is booming. Businesses that operate in the e-commerce space continue to be profitable, even as brick and mortar stores struggle. As more customers make purchases online, businesses that support e-commerce will see increased revenue.
Factories help businesses manufacture domestically. Warehouses store and distribute goods across the country. Even with decreased activity in many other commercial real estate sectors, industrial properties show signs not just of surviving, but of thriving amid this pandemic.
The commercial real estate world has changed in the blink of an eye. If investors and property managers are to stay afloat, they must rethink the way they approach CRE – and quickly.
Real estate professionals must get creative with the ways they purchase, renovate, and use commercial space, changing alongside tenants and customer needs.
With falling occupancies and profits decimated, it’s high time for investors and property managers to repurpose commercial spaces based on area trends.
Commercial real estate investors should consult an industry professional before purchasing or selling any property. The CRE pros here at CXRE can help you identify the properties that best fit your financial needs.
In a time such as this, focus on credit.
The Coronavirus has already impacted the creditworthiness of several large-scale investment firms across Europe. As tenants fail to pay, and investors invariably miss payments to lenders, credit scores fall. As a result, many investors will see long-term impacts on their ability to borrow money in the future.
It’s vital to maintain a good credit rating during this pandemic. As such, any method investors can find to support tenant payments, reduce outstanding debt, and make payments to lenders will be beneficial.
Evaluate Tenant Creditworthiness
Investors and property owners should focus on more than their own creditworthiness. They should also evaluate the credit risk of potential and current tenants.
By thoroughly evaluating a tenant, investors and property owners can make wise decisions about pricing strategies, deposit requirements, and other lease terms that might encourage on-time payment.
Understanding a tenant’s credit risk can drastically impact an investor’s viability.
Continue to be Adaptable and Innovative
COVID-19 is an unprecedented virus, and we are living in an unprecedented time. Therefore, investors, property owners, and property managers must continue to find adaptable and innovative ways to manage their commercial real estate businesses.
Use Virtual Solutions
Digital and virtual tools help CRE professionals maintain oversight without risking public health.
Property managers can create virtual tours, build 3D floorplans, and use video conferencing tools to connect with potential tenants. Update payment portals and tenant communications software to allow for no-contact bill pay, maintenance requests, and other management tasks.
Additionally, protect your online interests from any malware or cyber-attacks. Update your cybersecurity software and educate yourself, your staff, and your tenants about the importance of best virtual practices.
Just like the financial crisis of 2008-2009, this too shall pass. We may not know when, and we may not know how, but rest assured, the market will bounce back eventually. However, the best way to ride out this storm is to invest wisely and avoid knee-jerk reactions.
Investing or making other real estate decisions out of panic rarely results in high rates of return. Instead, consult with investment professionals, study the current trends, and make decisions based on all the information available to you.
Protect Cash Management
Investors and property owners are likely to feel the economic impacts of the Coronavirus crisis long into the future. As such, it’s essential to take a serious look at your income, expenditures, and investments and make some changes to protect your portfolio.
First, identify where you can cut back on expenditures. Eliminate inefficient spending and find innovative ways to both maximize income and minimize losses. Create new methods to reduce inventory and lease vacant properties. This might mean encouraging tenants to sublease, adding incentives for new tenants, making concessions for existing tenants to help them pay their rent, or creating a new marketing strategy.
While it may seem counterintuitive to invest in technology updates when you’re trying to minimize expenditures, you’re likely to see a significant return on investment by doing so.
Depending on your asset class and property type, technology updates could be incredibly profitable.
For instance, if you own or manage multifamily properties, your tenants are likely working from home (like many Americans). If you increase bandwidth, offer free WiFi, or update other technology that makes working from home more accessible, you’re more likely to retain current tenants and attract new work-from-home tenants.
Likewise, if you invest in technologically advanced health and safety procedures, like UV cleaning options and HVAC filtration, office renters will feel more comfortable leasing your space. And certain automated technologies and artificial intelligence products could save you thousands if implemented correctly.
Quite often, technology upgrades are well worth the investment.
Potential Long-Lasting Impacts on the CRE Market
No one knows just how long this crisis will last. We’re in an unknown time, facing an unknown virus, and struggling our way towards an unknown solution.
However, as time goes on, economists and real estate professionals study the data and try to make sense of the current situation. The experts agree that the longer this pandemic and its effects last, the more likely we are to see permanent changes in commercial real estate.
Changing Habits Will Become Permanent
Early on, working from home, teleconferences, and virtual meetings felt awkward. However, several months in, these habits have become commonplace. The longer we practice these at-home business practices, the more we begin to see them as “normal.”
Furthermore, research shows that working from home does not negatively impact worker productivity. Just the opposite, studies suggest that employees are not only more productive from home, but they’re happier, too. Working from home eliminates many of the time-consuming and stressful daily practices, like long commutes, traffic jams, and office politics. Therefore, employees are happier overall, leading to a better work environment for everyone.
As business owners begin to understand this fact, they are more likely to allow employees to continue working from home. Therefore, large office spaces become less necessary, even for large corporations. Virtual work environments may continue to be the norm, perhaps long after Coronavirus fades from view.
Work from Home and CRE Investing
The work-from-home atmosphere is great for employees. But it’s not so great for investors, property owners, and commercial real estate property managers.
With the pandemic impacting nearly every business’s bottom line, companies are looking for ways to cut expenses. When employees can successfully work from home, companies can downsize workspace or sublease unused office space.
As more companies downsize, office building owners will begin to see a marked decline in occupancy rates throughout the country. While some businesses intend to stay put, others will consolidate locations as their leases expire.
Some second-quarter estimates show a 44% decrease in leasing activity year-over-year. And investors can expect that trend to continue. Vacancies could rise in large markets throughout the U.S. Rents may drop as much as 25% in some areas. All of that spells tough financial times ahead for investors, property owners, and property managers.
Impacts on the Retail Sector
While brick-and-mortar retail stores are floundering during the pandemic, e-commerce is seeing record profits. Q2 saw a nearly 45% increase in online retail sales compared to Q2 2019. However, total retail sales still saw a slight decline from 2019 spending.
High unemployment doesn’t seem to be hampering consumer spending, at least as we head into the second half of 2020. However, with more customers adhering to strict social distancing measures, brick and mortar stores must turn their attention to e-commerce if they are likely to survive.
Again, the longer consumers practice new habits of online shopping, the more those habits become commonplace. Even as retailers open their doors, spending remains mostly online.
For investors, online shopping means brainstorming new and innovative ways to repurpose retail space.
Multifamily Real Estate Investors and COVID-19
As we mentioned previously, multifamily commercial real estate is experiencing mixed impacts during the pandemic. Multifamily properties near busy metro areas may see an increase in vacancies, while those in suburban areas could see an increase in leasing activity.
Multifamily investors, property owners, and property managers can embrace the changing times and still turn profits during the pandemic. Technology investments can make multifamily properties more appealing as tenants continue to work from home. Improvements in cleaning services, HVAC filtration, and other health and safety measures can attract new tenants to the property.
Affordable housing will likely continue to be a stable investment. However, luxury apartment and condo rentals may see a sharp decline as tenants move away from city centers or downsize due to job loss. With eviction moratoriums expiring, multifamily property owners are more likely than ever to see an increase in renters missing payments and facing eviction proceedings.
Economist Forecast for the Remainder of 2020
The numbers are in. During the first half of 2020, commercial real estate took a significant hit thanks to COVID-19. The hotel and retail sectors faced the most considerable losses. Meanwhile, multifamily and industrial properties fared relatively well, considering the economic downturn. The office sector fell somewhere between, with some locations seeing significant losses while others maintained their footing.
All that considered, what do experts think will happen as we head into the second half of 2020?
Rate of Return
Commercial real estate investment has seen an estimated one percent rise in perceived risk since January, based on the difference between the rate of return and the 10-year Treasury note. The hotel sector represents the highest acquisition risk, followed by retail investments, office properties, multifamily, and industrial.
However, May brought positive news about employment trends, and the risk premium for acquisitions (the difference between the perceived rate of return and 10-year Treasury note) has dropped somewhat.
While some investors are still cautious about purchasing commercial real estate during the pandemic, job growth is lessening investor anxiety.
Economists Give Their Predictions About Real Estate
Even though the real estate sector is currently experiencing hardship, economists don’t think it’s going to last. In fact, economists agree that this economic downturn won’t be as drastic as we saw with the collapse in 2008.
Instead, economists expect the American gross domestic product (GDP) will increase in 2021 and 2022. As a result, experts expect a relatively minimal impact on the real estate sector compared to the global financial crisis.
Globally, real estate prices may fall as much as 7%. While that may seem drastic, it’s nothing compared to the 13% drop we saw during 2008 and the more than 20% freefall in 2009. However, some prices – namely in the multifamily and industrial sectors – may see slight increases compared to 2019.
Hotel and Hospitality Outlook
However, some real estate industries will see more severe impacts than others. The hotel industry has seen dramatic impacts on vacancy rates. Some experts predict the hotel industry won’t be back to pre-COVID levels until at least 2023.
Many publicly traded hotel companies and hotel REIT holdings have fallen dramatically since the beginning of the year. Mid-cap hotel REITs have seen as much a 70% decrease in share prices since January. While larger REITs can still cover the cost of shareholder dividends, investor confidence is low.
Real Estate Transaction Volume
Experts predict a slowdown in real estate transactions in the short term. This year, we could see a 50% decrease in real estate transactions compared to 2019. However, long-term forecasts predict that the market will rebound relatively quickly. Economists doubt we will see a downturn even remotely comparable to the global financial crisis era.
Gross Domestic Product Predictions
One troubling number is the estimated constriction of the GDP – possibly as much as 6% this year. If realized, this would be the largest single-year decline since 1946, which saw an 11.6% decrease. However, economists predict this decline to be short-lived. 2021 should see a forecasted 3.9% growth in GDP, and 3.6% in 2022, both of which are above the long-term average of 2.1%.
Furthermore, job recovery is expected to continue, reaching 5.9% by the end of 2022.
Factors in Economic Recovery
It’s important to note that, while economists are making their best predictions, this is an unprecedented time in the world. The COVID-19 pandemic is an ever-changing situation. Economic recovery is based on several factors, including our ability to control the virus’s spread, implementation of a vaccine, and job creation programs, just to name a few.
Investors, property owners, and property managers should continue to follow commercial real estate trends. Consult with your CRE professional or investment advisor to make the best investment decision amid this changing landscape.
Opportunities in Light of the Pandemic
Investing might seem like a massive undertaking during a pandemic. However, COVID-19 has created several areas of opportunity for commercial real estate professionals.
The Coronavirus pandemic made it more evident than ever how important it is for people to have secure, reliable housing. Even when construction halted in major metropolitan areas, affordable housing construction continued.
With millions of Americans facing possible evictions due to job loss, builders are scrambling to create more affordable housing opportunities. Investors have an unparalleled opportunity during this time to capitalize on affordable housing projects, opportunity zones, or other real estate opportunities in this arena.
While some tenants leaving the city in search of more space and a quieter lifestyle, plenty of others are staying put.
Traditionally, the multifamily sector has weathered nearly every crisis in modern American history. Terrorist attacks, financial crises, and economic downturns: multifamily investments remain relatively steady.
Will they remain a safe investment during a pandemic? Experts seem to think they will.
The reason is simple: people need a place to live. No matter what’s going on with employment rates, retail centers, or office buildings, Americans need a roof over their heads. And in tough economic times, people tend to relocate from costly single-family homes to more affordable multifamily living. Therefore, even amid a pandemic, multifamily occupancy rates are expected to remain steady.
Furthermore, multifamily properties will likely see lower turnaround rates during the pandemic. That’s because tenants are wary of packing their belongings, interacting with property managers at a new location, and moving into a new building with unknown health concerns. Therefore, more tenants are renewing their leases, leading to the lowest turnaround rates we have seen in a decade.
Investors continue to view multifamily properties as a solid investment. And with so much uncertainly surrounding commercial real estate, now might be a good time to invest.
COVID-19 has completely changed the way we work. Both employers and employees see the value of working from home. Productivity is not negatively impacted. Employees are happier and are achieving a better work-life balance.
In a recent study, 98% of employees said they want to continue working from home at least part-time for the foreseeable future. And technological advances can help us achieve that goal.
However, working exclusively from home may not be the future of business. Instead, experts see co-working spaces, where a handful of employees can come in at any one time while still maintaining social distance. These offices might feature several desks, a conference room, or even just meeting spaces where employees can go to brainstorm ideas.
For investors, the future is full of possibilities. As businesses innovate ways for employees to work together, investors have the opportunity to join in on the ground level and help create the spaces these companies need to thrive.
Warehouses and Industrial Sector
If there is a winner during this pandemic, it’s the industrial sector, specifically warehouse properties.
Initially, many brick and mortar stores across the country closed their doors as COVID-19 began to spread. Americans stayed indoors for weeks at a time. During that period, we did nearly all of our shopping online.
Even as stores begin to open, many with modified schedules, consumers continue to flock to e-commerce. It’s a safe solution, allowing us to get what we need, delivered right to our front door, without the risk of crowded retail centers.
This e-commerce boom benefitted commercial real estate, too. The industrial sector saw a significant increase in the demand for warehouse space. More retailers are leasing industrial spaces to manufacture, store, and ship goods throughout the U.S.
Investors are shifting their focus to the industrial sector, too. The first half of 2020 saw sluggish industrial property acquisitions. But as e-commerce heated up and rents rose, investors began seeing the opportunity presented in this crisis.
There’s no end in sight to the e-commerce explosion. Even while other commercial real estate investment sectors are stalling, warehouse acquisitions continue to prove profitable.
Consumers aren’t just buying clothing and office supplies online. We’re also turning to the internet to complete our grocery shopping.
Grocery stores are seeing a historic demand for delivery and no-contact pick up grocery orders. To meet this demand, many grocery retailers are seeking out cold storage facilities to keep produce and other perishable goods ready for quick delivery.
With more than 95% of all food in America transported through a third-party facility, it only makes sense than cold storage facilities are springing up all over the country. Coronavirus has only increased this demand, with more Americans cooking at home. Therefore, the demand for fresh produce, meat, dairy, and other perishable items is higher than ever.
Additionally, pharmaceutical companies are demanding more cold storage space. Many pharmaceutical products are temperature-sensitive and must be stored and shipped in refrigerated containers. The Coronavirus has only increased the demand for locally-produced medications, giving rise to yet another player in the cold storage race.
For commercial real estate investors, cold storage represents a solid investment opportunity.
Unfortunately, high unemployment rates mean millions of Americans are struggling to pay their mortgages. And while the impact isn’t expected to be as dramatic as it was during the 2009 housing crisis, experts still anticipate a sizeable number of foreclosed properties in the coming months.
For investors, these foreclosures represent unbridled opportunity to own single-family rental properties, multifamily properties, or commercial real estate at rock-bottom prices.
However, this investment strategy requires patience, as it may be several months before foreclosures are completed. What’s more, commercial investments, like foreclosed office buildings, retail centers, and the like, could sit empty for many months or even years. Patient investors will buy and hold these properties until the market turns, and they can lease or sell for a profit.
No one knows for sure what the future holds. As the COVID-19 pandemic changes and shifts, commercial real estate investors watch, waiting to see the full impact on business.
While the pandemic has created some challenges in the commercial real estate field, it has also revealed opportunities. If investors know where to look – and can exercise a fair amount of patience – they can find hidden gems among the CRE ruins.
For more information about CRE investment opportunities, please contact one of our real estate professionals.