The Word From Brokers and Investors: A View From the Deal-Making Trenches of Commercial Real Estate
In early March, implementation of broad-based measures to quell the rapid escalation of COVID-19 cases delivered a sharp, swift shock to the economy and commercial real estate, in particular. Compared to previous economic crises, “this one is a shock of a different color,” observed Spencer Levy, chairman of Americas research and senior economic advisor with CBRE in a recent CREW Network Virtual Conversation Corner.
The deal-making world is clearly in a much different place than it was a month ago. As we all process an overwhelming amount of data, webinars, news and analysis devoted to the pandemic’s impact on the CRE industry, we at LightBox are staying in close contact with our clients who sit on the front lines of commercial property deal-making. Below is a summary of the observations that brokers and investors from across the U.S. have been sharing with our team.
On New Property Listings and Transactions
One thing is certain: There is no universal consensus on how COVID-19 is impacting the market. Clients’ reactions vary by region and change depending on their asset type focus. Yet, there was an immediate falloff in new deals being brought to market in response to early March’s business closures and shelter-in-place directives across the country. The number of bidders declined materially. Some lenders have stepped up activity, while others have dropped to the sidelines to wait out the risk.
Some commercial property deals continued to move forward. Others have stalled pending price renegotiations in the context of the new market climate. Potential sales could be impacted by concerns related to potential tenant lease default and cash flow concerns as work closures continue and unemployment numbers rise. There are widespread concerns that some deals which are currently being marketed, may end up not closing at this time at all.
For those deals that are still proceeding, project timelines have been adversely impacted by the difficulties associated with conducting loan closings remotely, while the ability for third-party vendors to conduct property inspections and complete engineering reports has been put into question altogether until the lockdowns are eased.
“Deals haven’t stopped, but everything is moving a lot slower. Lenders are stopping or pumping their brakes. Investors are still looking to buy certain asset types like industrial, but financing is halting the process.” ~Managing Principal at Southeast broker
On the investor/developer side, some report a “wait-and-see stance” as they consider the potential impact on values that the fallout from Coronavirus will have. We expect to see a bifurcation in the market depending on the quality of the tenancies and the impact those tenancies will have on the financial robustness of such assets.
“While not immediately targeting taking additional assets to market in the next few weeks, we will still be forging ahead on listings in our pipeline to move into the market or continue to market.” ~ Broker in the Southeast
On Asset Class Shifts
The ultimate winners and losers will depend on which asset class buyers and sellers are focused on. The obvious and immediate impact of COVID-19 was felt in the hospitality sector.
While retail has certainly been hard-hit, we have noticed a split in activity between properties with grocery or pharmacy-anchored assets that have seen remarkable levels of demand, going from “dead assets to prized possessions” in the words of one broker in the Northeast. In contrast, malls, small retailers selling non-essential goods, gyms and restaurants are almost completely shut down with many businesses that occupied these spaces expected to close permanently.
Brokers are optimistic about the outlook for industrial facilities. Strengthened by the deep and liquid capital in this sector, industrial is widely perceived as the best protected asset class right now and expected to weather this storm well. Industrial could also benefit going forward as some manufacturing reverts to the U.S. in an effort by domestic firms to reduce supply chain risk.
Another high-value focus for investors are land sales/purchases. The fact that these trades can close with no need for a site visit and that development and planning takes 12-18 months means many such active players are happy to go ahead and get deals done.
The impact on both office and multifamily varies depending on location. We have already seen data that suggests nearly 30 percent of multifamily tenants did not pay their rent in full between April 1st and April 5th. Office tenants too are expected to be seeking rent relief, in turn putting the financial burden onto landlords. Swift action by the federal government and the CARES package is hoped to soften the blow.
Across all asset classes, landlords are very concerned about tenants’ inability to pay rent. Tenants are looking for brokers to extend lease terms to help get lower rental rates and concessions. The knock-on effect has seen some lenders respond by granting forbearance for missed payments.
Construction cease orders are impacting home builders directly as they need to cut back on their project starts and comply with government restrictions on construction.
On What We Can Expect in the Coming Months
Despite the pull-back in listings, leasing and transactions in March, broker sentiment is relatively optimistic. Although no one predicted this type of market disruption, many brokers were primed for a market correction at some point in 2020. The fact that the pandemic hit a market that was experiencing the best fundamentals on record (e.g., low vacancy rates, healthy construction levels and relatively low LTVs) is fueling the expectation by many brokers that delayed transactions will ramp up quickly when we return to a more normalized capital markets environment. The federal government has also taken unprecedented action with the biggest stimulus package in our history to provide relief to impacted businesses and attempting to guarantee the liquidity of the financial markets.
In the near-term, as deals that were already late in the pipeline when the pandemic hit work their way through to closure, the question on everyone’s minds is: What’s going to get done moving forward? Brokers are in the early stages of preparing for an expected increase in distressed asset opportunities.
“I think most brokers and investors will take advantage of the current market as it’s a great time to buy and a great time to lease because there will be fire sales of distressed assets and evicted tenants freeing up space.” VP at major broker in Midwest
With the market on pause in terms of new listings, there is a sense of sitting back and readying for an uptick in activity when things settle down.
“We could be back in full acquisition mode soon, but for the time being we cannot travel, conduct due diligence or get financing moving forward so we’re waiting to see what unfolds next.” ~ Broker in California
Another broker predicts a financing boom once the pandemic passes. It is still too early to guess when sellers will be comfortable listing properties again, when buyers will have access to financing, and when we will be able to determine the impact on commercial property values. The precise impact that the Coronavirus lockdown will have on our industry depends on many factors including how quickly the health crisis is controlled and shelter-in-place orders by state and local governments are lifted. We are also looking at the longer-term societal impact as we question when the population will again be comfortable using public transportation, going to the mall or to the movies and when people will want to visit large office buildings, gyms, restaurants and bars. Another major trend to watch will be an increase in airline schedules and hotel occupancy rates as we move through the rest of 2020 and beyond.
LightBox is grateful to our broker clients who shared their candid feedback with our team. We will continue to collect timely feedback, and report observations back to you as we all navigate this unprecedented time in the market cycle.
For more information, contact us.