Not all commercial real estate is being negatively affected by the coronavirus. Some commercial real estate is seeing tremendous demand. This post provides a great overview of how commercial real estate is affected by the coronavirus pandemic.
The expert insights come from CrowdStreet. CrowdStreet is one of the leading real estate marketplaces today. It focuses on real estate opportunities in 18-hour cities where valuations are cheaper, rental yields are higher, and growth rates may be faster due to positive demographic shifts.
We've discussed how single family home prices are holding up during the pandemic. The reasons why include: low inventory and mortgage rates are at record-lows.
It's worth looking for bargains from the same sellers who sold stock when the Dow was below 19,000. These motivated sellers are out there. You just have to aggressively look to find them.
Now I want to turn our attention towards commercial real estate. I want to understand which types of commercial real estate are being most negatively impacted. It's also good to know which types of commercial real estate are holding up. There is investment opportunity, especially as the economy gradually opens up.
Commercial Real Estate And The Coronavirus
Let's analyze the various sectors from best performing to worst performing. Here's how commercial real estate is being affected by the pandemic.
Industrial Commercial Real Estate
The long-term trend towards online shopping is strong. However, practically overnight we were all forced to buy everything online. Demand for large-scale distribution centers has skyrocketed in response.
At the same time, many distributors and retailers have found out the hard way. They do not have adequate last-mile distribution (the “out for delivery” part of your package tracking). This is often the most expensive and complicated part of the shipping process.
PWC shows 62% of consumers expect orders to be delivered within two days of purchasing. People want their goods and they want them now!
Odds are there will be heightened demand for even more last-mile distribution spaces, especially in growing metro areas, as companies strive to ensure they are well-positioned for the future.
Industrial Data Centers
Another type of industrial–data centers–are also lagging behind demand. Video conferencing company, Zoom went from 10 million daily meetings in December to over 200 million daily meetings in March, for instance.
The past month has exposed which cloud companies did not have adequate server space to handle an entirely remote workforce. Although that demand may level out when offices reopen. Cloud-based businesses will continue to put a heavy stress on existing data centers.
Amongst REITs, data centers (Digital Realty Trust, Equinix Inc., CyrusOne, CoreSite Realty and QTS Realty Trust) were the only industry segment to show a positive gain for the first quarter of 2020, growing by 8.8%.
CrowdStreet’s Investments team recently approved the company’s first data center deal. The company is looking to launch the project on the Marketplace soon. In the meantime, you can have a look at what's currently available.
CrowdStreet’s Chief Investment Officer, Ian Formigle, says, “This particular project represents a sale-leaseback with a company in the cloud computing space. The tenant’s business has shown signs of strengthening during COVID times, with an uptick in demand of services and increased revenues.”
Multifamily Commercial Real Estate
Multifamily is a “recession-proof” asset class. The reason why is that everyone wants/needs a roof over their head.
Multifamily properties are doing well. People are working from home. Strong rent collection continues.
In a recent live stream with CrowdStreet, Melissa Reagen of Nuveen Real Estate pointed out that 89% of apartment rents were collected in April, with higher quality apartments collecting at a higher rate. You can sign up to watch the insightful video.
Andrew Akers, a Senior Advisor with The UIP Companies, Inc (UIP) suspects that investor interest in the firm’s recent CrowdStreet offering–a Class A, stabilized multifamily asset in a major metro–represented investors’ “flight to quality.”
Akers believes that the ongoing market uncertainty actually helped solidify the thinking of many real estate investors–buying a quality asset in a quality market, even in a time of stress, can be a good recipe for wealth preservation in addition to income and long-term appreciation.
However, workforce housing–often occupied by “blue-collar” households where jobs are tied to retail, the service industry, and construction–may find it harder to collect rent on time or in full.
To keep people in their homes, many municipalities are enacting strong renter protections to prevent evictions. Some landlords feel the squeeze. But most are doing fine so far.
The ability of a landlord to collect rents is heavily tied to what their tenants do for work, so now, more than ever, it is important to understand the employment and economic drivers associated with the renter population of a property.
Medical Office Commercial Real Estate
The difference between critical medical tenants and non-critical tenants is very apparent at the moment. Elective and non-essential procedures are being canceled in order to protect both patients and healthcare workers, but some procedures–including dialysis and chemotherapy– can’t be postponed.
Regardless of whether a medical tenant provides critical services or not, they often have a loyal patient base who will be looking to schedule services. These services include everything from a teeth cleaning to ACL reconstruction surgery. Pent up demand is building in 2H2021.
And thanks to the high cost of moving and heavy/expensive build-outs often required to bring a new medical office inline with the appropriate codes, it’s likely that most medical tenants will not break their leases and will opt to renew when the time comes.
Office Commercial Real Estate
According to real estate data company CoreNet Global, the average amount of space per employee dropped from 225 square feet in 2010 to 176 square feet in 2012. And it’s not like we’ve given employees that space back since then.
With the majority of traditional office jobs now working remotely thanks to COVID-19, many office tenants are realizing some jobs can stay remote even when we’re allowed back in the office. This could further decrease the overall need for office space.
CrowdStreet’s Chief Investment Officer Ian Formigle believes that COVID-19 is going to fundamentally change the way we think about and use office space. “Now that the decision makers have been forced to work from home, they might have very different opinions about what their office needs to look like.“
Even the CEO at Morgan Stanley, James Gorman said the firm is likely to keep some percentage of its workforce at home.
Work From Home Efficiencies
“With 90% of our employees at home, we've had almost no issues from our plant,” Gorman said. “Can I see a future where part of every week, certainly part of every month, for a lot our employees will be at home? Absolutely.”
On the other hand, there might also be a renewed importance placed on personal space and adequate distancing between employees. This could prove to increase office demand.
It’s important to remember that “open for business” will likely not mean everyone comes back to the office on the same day. Employees will probably be “phased in” over the coming months to help ensure everyone’s health and safety.
It’s too soon to say for sure exactly what the office of January 2021 will look like. But odds are it’s not the office of January 2020.
The below chart provides an idea of how Industrial, Office, and Retail commercial real estate is performing post the coronavirus pandemic so far.
Hospitality Commercial Real Estate
The hospitality industry is being hit the hardest by COVID-19.
Back in July 2020, about 25% of Marriott's 7,300 hotels around the world are shut down. Across the U.S., about 80% of all hotel rooms are empty.
As the immediate impact of COVID-19 became clearer, CrowdStreet’s Investment team purged almost all of the hospitality deals from the Marketplace’s pipeline.
As CrowdStreet’s Director of Investments, Anna-Marie Allander Lieb, put it, “We saw the hospitality sector quickly decline with occupancy falling and bottoming out at approximately 20% nationwide. Historically, rebounds in the hospitality sector have taken twice the time it took to decline.
However, given the vastly different circumstances this time around, we’ll be looking for signs that the country is emerging from COVID-19.
We’ll also pay attention to how things unfold in China and areas of Europe. Europe and Asia are further ahead in their recoveries. That being said, we are starting to see opportunistic plays in the space. There is some distressed pricing at a 60% discount to current basis.”
Today, hospitality is bouncing back tremendously. See: How I'd Invest $100,000 Today. It discusses Sam's thoughts on investing in hospitality commercial real estate.
Retail Commercial Real Estate
According to the National Retail Federation, the retail sector contributes approximately $2.6 trillion (about 25%) to the U.S. GDP and is the nation’s largest private-sector employer. However, with only essential businesses allowed open under most stay-at-home orders, retailers have been hit hard. They have furloughed workers and shuttered stores.
According to Marcus & Millichap, April rent collection ranged from just 10-25% for mall owners with higher concentrations of nonessential tenants. Nonessential tenants include fitness centers, hair salons, bookstores. Rent collection was 50–60% for landlords with “essential” tenants such as grocery stores and pharmacies.
What’s interesting is that it’s not just mom-and-pop retailers struggling to pay rent. Large retail tenants including Burlington Stores and Petco Animal Supplies. LVMH Moët Hennessy Louis Vuitton, Victoria’s Secret, and Staples all failed to pay rent in full.
Only time will tell which retailers will recover first when consumers feel confident enough to go out and shop. CrowdStreet Investments team typically looks for retail investment opportunities anchored by a grocery store. Grocery stores tend to keep parking lots full.
Investing Opportunities In Commercial Real Estate
Here are the key points from CrowdStreet's analysis on commercial real estate and the coronavirus:
- Industrial commercial real estate looks to be the most attractive type. This is due to the growth of distribution centers and data centers.
- It's preferable to focus on Class-A multifamily apartments in a major metro. This is due to a greater percentage of white-collar workers who can work from home.
- The default assumption is that office commercial real estate will decrease short-term as more employees work from home. However, office commercial real estate demand may actually increase over time. This is due to the desire for more personal space and adequate distancing. Workers will get more space now.
- Hospitality commercial real estate may have the most opportunity for investors given CrowdStreet is seeing ~60% price cuts. If you believe travel will eventually come back, hospitality looks enticing at such levels.
- Look for retail commercial real estate that has a grocery store as an anchor. However, retail's long downward trend is now accelerating.
As economies open up, the demand for commercial real estate should gradually rebound.
The key is to be opportunistic and look for deals that are offering sweeter terms to boost the risk/reward profile. CrowdStreet is diligently looking for such deals to showcase on its platform. Then it's up to us to invest in the ones that fit our investment goals the closest.
The commercial real estate market is roaring back post-pandemic. Multifamily homes and build-to-rent projects are especially attractive. I'm personally invested in more commercial real estate today.