Looking forward, not backwards
What an interesting time to be involved in real estate as we experience one of the most unique situations in history. The Covid-19 pandemic has affected all of us. Analysts across the world are trying to measure how the Commercial Real Estate (commonly referred to as CRE) market will weather the storm. As both a salesperson and owner of an appraisal company I am seeing two different sides. The brokers are worried about the appraisers. Is my client’s property going to appraise for at least the sales price? Does the appraiser need to get inside the property? What will the appraiser rely on for data?
Meanwhile appraisers are wondering about the market out there. Should I adjust sales for market conditions yet? When will I know? Will the contract price be re-negotiated? What are brokers doing?
My years as an appraiser allows me to bring value to my buyers and sellers by realizing the methodologies used in the appraisal world. After over 20 years in the appraisal world, this knowledge helps me to find and negotiate better deals for buyer and more accurately help with setting a list price for my buyers. I like to think that the interaction of these two sides helps make me better able to serve my clients on both sides.
What does this all mean in the current time? Well below are some of the highlights from all my research, interviews, and many webinars following some of the top brokerages across the country, the Appraisal Institute, and the CCIM Institute.
Let’s start with the good. Industrial properties appear to be faring well and are expected to continue so. Richmond had a very healthy market for industrial properties pre Covid-19. This is expected to continue. There is some slight evidence that flex space, often on very short-term leases, may increase in vacancy. However overall the market is expected to continue to do well, especially as more storage is needed for medical equipment and online retailers grow and need distribution space.
Multifamily has also been a hotspot for investors in Richmond and across the country. Unfortunately the inevitable rise in foreclosures of single-family homes may fuel this industry demand some. However we are already seeing some lowering of rents, especially in the luxury market. This is largely fueled by a high amount of construction over the past few years that in some areas were starting to exceed demand. An inevitable fall in rents was apparent, even if slight, before the Covid-19 situation. It remains to be seen whether the stimulus offered by the government, including forbearance of mortgage payments, will be enough to keep owners in their homes, or whether this will force homeowners into apartments and other rentals.
One other sector affected is student housing. For Richmond, this could be a hard-hit sector. However many towns are already seeing hospitals move towards leasing these rooms for additional patient rooms, which will help bring extra revenue to colleges, many which are offering refunds to students for unused housing and meal plans. VCU has already announced plans to use the Honors College dorms for patient overflow.
It is hard to ignore the obvious downside of the retail and hospitality industries. While I could go into analysis breaking down the effects Covid-19 has had on individual sectors of the restaurant industry, it is safe to say that all restaurants have been affected. Many sit-down restaurants are down in sales up to 90%, trying to survive on takeout and delivery. For restaurants/bars that depended on alcohol sales, this is devastating. Retail has been severely impacted as well, as many are forced to close under state orders. Obviously certain sectors like grocery stores have been the shining stars of the industry and will inevitably hold up those anchored centers as investors continue to collect rent from these anchors while smaller stores struggle.
Hotels have taken probably the biggest hit of any sector, aside from restaurants. Within the first two weeks of the pandemic hotels were down 60% as many business travelers and vacationers cancelled their plans. Now many locations are up to 90% vacancy. For some, the possibility of filling these rooms with hospital patients as these medical facilities run out of room may gap some of this income.
And In Between:
That leaves one more sector: office. After the 2008 recession office took a hit, especially in the Class A market. However the last few years have seen office vacancies decrease, rents increase, and new construction across the Richmond MSA. Office, traditionally looked at as slightly risky with a higher capitalization rate, had investors looking for offices to invest in and cap rates fell. How Covid-19 will impact this sector remains to be seen. Some sectors such as medical office are expected to continue to do well (assuming no major impact on the ability of medical doctors to collect on billing from the virus). There is concern that companies may downsize to needing smaller office space. Once companies have seen that teleworking can work, they are reevaluating the need for their larger offices. I personally have two clients I am working with that have downgraded the amount of space they need and intend on continuing to telecommute for many of their employees.
Look forward, not backwards
We cannot compare the Covid-19 pandemic to past events like the 2008 recession. The 2008 recession was not sudden but rather a result of months leading up to the market crash. The virus was sudden and will likely last a few months before an end is in sight.
The biggest unknown in the Covid-19 is the ending of this event. The markets rise and fall with the newest updates and stimulus packages. For weeks I have listened to webinars on what will this look like on our long-term historical charts-will it be a V shaped event (a sharp sudden downturn with a sudden upturn)? A U-shaped event (a downturn, with a lull at the bottom, followed by an upturn)? L shaped (well you can probably figure that out-a downtown that is flat at the bottom)? Interestingly many large commercial real estate companies say this will be the ‘Nike swoosh’. We entered this event during a strong economy. It is inevitable that our markets will take a sharp decline however nearly all experts have predicted the rise will bring us to similar markets as before and continue to go up. We will see a recession but not a depression.
The local commercial market continues to be active with new commercial listings, pending contracts and closed sales. Personally, my clients continue to push forward. The consensus is that this will be a short-lived event. Of course the situation can change depending on several factors. While there is no doubt the 2nd quarter will take a hit, most are expecting the 3rd and 4th quarters will recover and be back to a healthy economy by 2021, if not before. The key is to look up, look forward, continue to support one another, and push ahead. This is a temporary bump in the road for CRE but I am convinced we will bounce back and the markets will be as good, if not better than before.
Stay healthy and safe everyone!
Heather Placer, CCIM, MAI, SRA, ASA