• Thu. Dec 1st, 2022

Evaluate real estate investments from a post-pandemic perspective


The COVID-19 pandemic is having a transformative impact on commercial real estate (CRE) markets. The crisis has highlighted longer-term questions about how social distancing measures will change the way people live, work and play.

As everyday life itself changes, so do the goals that lenders and investors use to assess the functionality and ultimate viability of commercial real estate. From apartment buildings and commercial buildings to offices and industries, all asset classes are examined from angles that have hitherto been inconsiderate.

With over 30 years of experience in commercial real estate financing, I have financed transactions in all types of properties, from specialty properties such as self-storage and parking to offices, industrials, hotels, businesses. and multi-family. I’ve been through several recessions throughout my career and understand that to be out of the ordinary when it comes to tough times, you need to be adaptable, open-minded, and tenacious.

While it is still impossible to predict the precise outcome of this pandemic, early evidence points to the following as key considerations for commercial real estate professionals looking to navigate post-pandemic waters:

1. Retailers will face an accelerating e-commerce revolution.

Seniors and others who are not digital natives are now getting used to shopping and other goods online, with COVID-19 causing a dramatic shift from physical to digital shopping. According to Salesforce Data, in the first quarter of this year, e-commerce revenue grew 20%, compared to 12% in the first quarter of 2019.

It’s safe to say that the brick-to-click revolution is here to stay. Even the previously booming experiential retail sector will need to address “normal news” concerns about sanitation and disease transmission. Given all of these challenges taken collectively, I predict that mall owners will need to show lenders how they expect to generate income.

2. Apartment owners may not see rental growth as expected.

Average apartment rents are falling across the United States According to National Real Estate Investor, the average rent in the United States on March 26, 2020 was down 0.23% from the previous week – a figure that may seem low but goes against “business as usual” trends. Typically, at that time, rents would have increased by up to 0.15% per week.

In the longer term, the demand for rental properties may increase as single-family homeowners feel pressure to downsize. At the same time, however, new concerns about the potential for the disease to spread in overcrowded buildings in large cities could impact housing decisions.

Moody’s Analytics highlights the potential for post-pandemic systemic leakage from urban to suburban areas and the growing interest in larger apartments. After all, if work and home study continue, it’s easy to imagine many paying more for more space.

3. Industrial real estate will reflect the disruption of the supply chain.

The World Trade Organization has predicted that world trade will fall from 13% to 32% in 2020, surely influencing industrial real estate. On the other hand, lenders will need to consider the growing influence of accelerating e-commerce trends on warehouse demand, especially for urban last mile locations.

In a post-pandemic world, American business leaders can choose to move manufacturing to the United States, diversify supply chains overseas, or both. Either way, the dynamics will change for factories, ports and infrastructure.

4. In offices, evolution is the key to obtaining funding.

Will COVID-19 mean more businesses will switch to flexible models in the future? If so, will they then rent smaller offices? According to a recent Gartner survey, 74% of CFOs plan to move at least 5% of their on-site workforce to remote positions permanently after COVID-19. More dramatically, nearly a quarter also plan to move at least 20% of on-site employees to remote positions permanently.

Yet the smaller footprints are not for granted. Some workplace experts question whether dense and open office environments will still be considered desirable after the pandemic. They also wonder if today’s social distancing rules will only make in-person engagement more valuable. One thing is certain: traditional formulas for calculating office space requirements will continue to evolve.

5. Self-storage could be a plus in post-pandemic loans.

Until now, self-storage is more resilient than other classes during the COVID-19 crash. National Real Estate Investor reports show that in March, demand for these properties was higher than usual, with some activity driven by students leaving campus accommodations. Although moves slowed in April, moves also slowed, resulting in higher occupancy levels overall.

6. The hotel industry has been hit hard, but Americans are eager to travel again.

Along with retail, hotels are one of the hardest hit asset classes, but there are nuances. In the United States, hotels have lost more than $ 23 billion in revenue per room since mid-February and are expected to lose more than $ 400 million per day in room revenue, according to the American Hotel and Lodging Association at the time of writing.

It can be encouraging that Morningstar anticipates a long-term recovery will help balance current declines in income. After the pandemic, I predict that lenders may view financing applications more favorably for properties that proactively plan reserves to allow continued payment of their mortgages in the event of a new crisis in the future.

As a global community, we are always working to understand this new normal. We do know, however, that investors need to think beyond how a property has traditionally been used and consider how the space might be reallocated in the future. This will require not only a hyperlocal understanding of the markets, but also an in-depth knowledge of macro trends. While no asset class will be spared by this crisis, it is clear that the future belongs to those who plan today.