While the COVID-19 crisis continues to unfold, now is a good time to assess where we’re at currently and what’s next for CRE.
The good news is that pre-pandemic, the US CRE market was robust – with low vacancies, high demand, and good interest rates. That will make the recovery surmountable.
The government has also provided unprecedented stimulus packages for businesses and consumers alike. Whether this will be enough remains to be seen, but it is a step in the right direction, to be sure.
The obvious issue that we’re facing is an uncertain future. If the pandemic continues to halt economic activity, demand for commercial real estate could drop drastically. Certain CRE markets will be fundamentally altered by the crisis – permanently, others will transition back to “normal”.
Retail and hospitality industries have been very hard hit, which of course has affected the properties themselves.
Hospitality
This disruption in the hospitality industry is noticeable. With an over 80% drop-off in occupancy, economic repercussions will span into the future. Its recovery will depend on the willingness of the population to travel when the stay-at-home orders are lifted – and stay lifted.
Extended stay hospitality, like assets in our portfolio, are expected to do much better, as this type of residence will still be greatly sought after, especially by those who have been displaced.
Multifamily and Retail
For both the multifamily and retail sectors, leases will need to be modified and renegotiated. There has been no freeze on rents, but there are moratoriums in many cities on evictions. Payment plans will be key to keep tenants and revenue on track.
Across multifamily, early predictions suggest that Class A assets will be in extremely low demand in the coming months and to encourage leasing, property owners will likely need to make concessions in their asking prices for rent. The hope is that this will last for no more than a few months and as people go back to work, demand will rise.
We are relieved that in our portfolio, April rent payments have surpassed expectations. We anticipate a similar trend in May. This is largely due to the fact that CGI assets cater to a different class than many multifamily investments. Residents who choose CGI properties are high-end creatives, digital entrepreneurs and others from select business classes. Most have stable employment and many already work remote. In fact, the feedback floating through the halls is that many of their digital businesses are thriving in the pandemic.
Finally, for properties in development, supply has become an issue due to stay at home orders, slowing progress. This will get better in the coming months- as orders are lifted, people will be hungry to return to work and demand will skyrocket.
Overall, what we see is a nation willing to work together to get life as we knew it back on track. Because of this, we believe that although a challenging future lies ahead, the CRE market will rebound stronger than ever.
