Top 4 Themes In Commercial Real Estate During the COVID-19 Pandemic
By: Brian Jenkins and Mike Conger
How is the COVID-19 pandemic affecting commercial real estate in San Diego County?
Our clients are constantly asking about what we’re seeing in our CRE market. During recent months, we have helped many of our clients weather the current storm and adapt their investment strategy by being alert to market trends, risks and opportunities. Below are the Top 4 themes of what we’re seeing in the CRE market.
It feels like an eternity since we wrote the last quarter’s market update memo. At that time, we knew frighteningly little about COVID-19. Lockdowns were underway around the world. The stock market had hit YTD lows. So in that chaotic moment, with the awareness of the massive uncertainty we faced, we decided to write transparently about the bull and bear cases for each product type, without bias. We would encourage you to go back and reference those scenarios, as each of those stories continues to be grounded in realities we’re seeing play out. We sincerely hope that you find the framework helpful, as we navigate the new real estate environment.
Top 4 CRE Themes to Watch in San Diego County:
Volatility – Contrasted with the stock market, where shares can be bought, sold, rebought and resold, in an instant from your iPhone, real estate is a MUCH longer sales cycle. From the time someone considers selling a piece of commercial property, to the time a transaction is complete, it is frequently 4-6 months or longer. Some transactions we’ve worked on have taken nearly 3 years! The time and complexities of a real estate transaction, reduce the upward and downward volatility. True, post-pandemic “Comps” are only starting to happen and be analyzed. Stay tuned!
Capital Markets – Lenders are lending and qualified borrowers are taking advantage of some of the cheapest financing in recent history. Many lenders have instituted rate floors and have larger margins than before, while still offering borrowers incredibly affordable and attractive financing. Yield curves appear healthy and it seems the Federal Reserve wouldn’t dare whisper about raising rates in the foreseeable future, which bodes well for values.
Tentative, Cautious, but Moving Forward – While volume has slowed, we have noticed that industrial, medical/healthcare, multi-family, and self-storage markets continue to trade at pre-pandemic prices, seeming largely immune to the economic impacts of the pandemic thus far. Retail and office have slowed further, but we still have not seen verified, significant discounting in pricing, and buyer interest remains. And with such affordable financing, buyers are still seeing better cash-on-cash returns, than before. One risk that many economists are concerned about is future inflation. Many say that most decision makers, investors, and executives today have not operated in an inflationary environment in their lifetimes. While that is definitely something to keep an eye on, real estate is largely a benefactor of inflation. And with cash on the sidelines, looking for a home, real estate is an attractive vehicle.
Balanced Risk and Reward – While today we still face record unemployment, and worrisome GDP numbers, the stock market has made a striking recovery. The CARES act, including Paycheck Protection Program (PPP) Loans, Economic Injury Disaster Loans (EIDL), and unemployment assistance, truly supported the markets and reduced immediate exposure significantly. At the same time, we have an investment market that internationally appears high risk, while bond yields are at all-time lows, and Wall Street is a hub of volatility. In this context, for the right deals, real estate appears to be an investment vehicle that could provide the best risk vs. reward balance. In a low-yield, high-risk investment world, real estate provides some of the best risk-adjusted returns out there, so long as risk is understood and hedged (e.g. more conservative leverage, etc.)
We continue to monitor the situation closely and are staying thoroughly informed on the massive amount of information being produced regarding health, politics, the economy, and the commercial real estate landscape.
We constantly encourage our clients to prepare for good economies and bad – often with strategies that hold up in either economic environment. It takes time, diligence, and forward thinking to put your real estate on solid footing for growth – and that message has never been more relevant than today.
We have built our business on providing quality insight and unrivaled customer service. This pandemic may pose new challenges for you so we wanted to offer our assistance in any way we can.
We would like to remind you that we are available for a free property review, mortgage review, lease analysis, and strategy discussion for anyone interested in getting prepared for any potential challenges that lie ahead.
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