2020 CRE Midyear Outlook: Weathering the Storm Ahead

Originally published by Commercial Observer on June 2, 2020.

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.

“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,” said Victor Calanog, Head of CRE Economics 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.¹ If sales don’t rebound, many businesses may be forced to close permanently—in a recent National Bureau of Economic Research survey, only 47 percent of small business owners said they would survive if the disruption continues for four months.²
• 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 trends 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. Some services—like haircuts, clothing alterations and bike repairs—can only be done 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,” said Alice Carr, Head of Chase 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: Despite a 2.1 percent increase in late rent payments from the same period in 2019, the majority of multifamily renters made full or partial payments as of May 13, according to the National Multifamily Housing Council (NMHC). Market-rate housing has fared better than luxury properties.

^{Source: The National Multifamily Housing Council (NMHC)}

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

Weathering the Storm Ahead

Small and midsized businesses have always been innovative, as the crisis continues to demonstrate. 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. The former provided quiet work areas and served as places for coronavirus patients to recover, while the latter transformed into community service centers with staging areas for care packages.

CRE owners and investors must continue to be responsive and flexible to weather economic disruption. A few options include:

• Move 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.
• Protect 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 to help 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.
• Be patient: This is especially true in terms of making new commercial real estate investments. You don’t want to be aggressive too early. Conserve your resources instead of 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.

^{1 Advance Monthly Retail Trade Survey, US Census Bureau, April 15, 2020.
2© 2020 by Alexander W. Bartik, Marianne Bertrand, Zoë B. Cullen, Edward L. Glaeser, Michael Luca, and Christopher T. Stanton, How Are Small Businesses Adjusting to COVID-19? Early Evidence from a Survey NBER Working Paper No. 26989, April 2020.}