Al Brooks’ CRE Mid-Year Outlook 

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When 2020 began, low interest and unemployment rates provided an especially favorable environment for commercial real estate (CRE) owners and investors. In the months since, COVID-19’s economic effects have impacted all asset classes. CRE owners and investors must prepare for the downturn’s continued effects, many of which are still in flux. 

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“Because transaction and leasing activity have slowed significantly, data on income flows and value change are actually difficult to assess. Still, given that we are projecting this economic downturn to be worse than ’08 and ’09, expect distress across the board for geographic markets and property types,” according to Victor Calanog, Chief Economist for Moody’s Analytics REIS.

 However, Calanog said, it is still important to consider nuances across geographic markets and property types. “Yes, distress will be severe – historic for some areas. But, some markets will weather the storm better, given a relative position of strength entering the downturn.” While things continue to change as the pandemic’s economic impact unfolds, there are a few macro CRE trends to watch through 2020, including:  

  • Retail hit hardest: In March, total retail sales fell 8.7 percent from the previous month. If sales don’t rebound, many businesses may be forced to close permanently—only 47 percent of small business owners said they would survive if the disruption continued for four months in a recent National Bureau of Economic Research survey.
  • Increased shift to e-commerce: E-commerce has been on the verge of replacing traditional retail for years, and the crisis has accelerated this trend by forcing people to change their behaviors. Whether it be ordering grocery deliveries online or making video calls, these behaviors are likely to last beyond the initial crisis and create continued demand for warehouse space. However, there has only been a slight decrease in brick-and-mortar construction. People can only get some services—like haircuts, clothing alterations and bike repairs—in person. 

 

  • Affordable housing is essential: “The coronavirus has underscored the importance of safe and decent housing to a person’s well-being, specifically in times of crisis,” according to Alice Carr, Head of Community Development Banking. To meet the continued demand, affordable housing was almost uniformly deemed an essential service and exempt from the country’s moratoria on housing construction.

 

    • Low delinquency on multifamily properties: Although the percentage of rent payments is lower, the majority of multifamily properties have received rent payments on time and in full with market-rate housing faring better than luxury properties. 

 

  • The role of tenant composition: CRE owners may continue to see different effects based on their tenants’ employment situations. In major cities, for example, shopping centers’ anchor grocery stores may be doing more business than usual due to stay-at-home orders, but the rest of the businesses remain dark because they have been forced to close.
  • Rethinking the workplace: Social distancing guidelines require property owners to reconsider their use of office space. In response, open-office concepts may require modifications. Co-working spaces will also be affected and should prepare for a drop in month-to-month tenants.

 

Withstanding the Storm

Businesses are innovating as the crisis demonstrates. When stores ran out of popular items, restaurants started selling groceries directly to customers. Likewise, distilleries shifted their operations to manufacture hand sanitizer. Gyms have shifted to virtual classes, and florists have started hosting virtual flower arranging workshops. Hotels and nonprofits also served new purposes during the outbreak, providing quiet work areas and serving as a place for coronavirus patients to recover, as well as offering community service centers with staging areas for care packages for surrounding communities. 

CRE owners and investors should continue to be responsive and flexible to weather economic disruption, by:

  • Moving to digital solutions: If you don’t have a website and online portal for rent payments and repairs, it’s time to put them in place. This way, tenants can easily communicate with you and transfer money. You can also take advantage of new contactless tools for notaries and titles. As part of your resiliency plan, make sure you can conduct important tasks—including banking—remotely.  
  • Protecting your business from cyberattacks: When it comes to cybersecurity, you can never be too prepared. Educate yourself and your employees on ways to protect your business along with tools and resources on how to spot different cybersecurity threats. Then, practice good cyber hygiene, and implement fraud protection measures for rent collection, invoice and loan payments, and other day-to-day tasks.
  • Being patient: This is especially true in terms of making new commercial real estate investments. You don’t want to be aggressive too early. Focus on strategic investments, rather than stretching yourself too thin. That way, when it’s clear the markets have leveled out, you’ll have enough liquidity to take advantage of the market correction.

Al Brooks is Head of Commercial Real Estate at J.P. Morgan