The United States’ commercial real estate market has seen dramatic changes over the past few months due to the coronavirus COVID-19’s impact on the global economy. Most forecasters are downgrading their outlook for both the Global and the U.S. economy. Instead of the U.S. economy continuing to hum along, it is expected that there will be a sharp downturn in the second quarter (Q2) with some bounce back beginning in Q3.
Since its peak in mid-February, 2020, the broad stock market is down over 30%. Real Estate Investment Trusts (REITs) are also down by even a bit more, 32%. REITs are always impacted by what happens in the stock market. REIT balance sheets are in the “best position they have ever been in with Net Debt to EBITDA of 5-to-5.5 times and Debt to GAV of 30-to-35 percent with limited near term maturities.” The best performing sectors have been Data Centers, down 6%, Towers, down 10% and Self-Storage, down 20%.
Hotels, to no one’s surprise, have had a massive fall off in demand. Some are forecasting that REVPAR may decline by as much as 37% for the year with the deepest impact coming in Q2 which is projected to decline by 60%.
Industrial still has strong overall demand even though short-term leasing activity will decline. The picture for industrial is still positive with supply chains increasing inventory and e-commerce continuing to pick up steam as people focus more on buying from home. There may even be an uptick in cold storage.
The Office and Retail sectors may be seeing the greatest market impact. Most industries focused on office development and expansion will likely hit the short-term “pause” button, especially in those industries that cater to oil and gas or leisure and travel.
Retail is really a mixed bag. Developments with national grocery chains, like Walmart, and pharmaceutical chains, like Walgreens, are leading the way. Other the other hand, enclosed malls, restaurants, bars and gyms are really struggling.
Multifamily demand continues to remain a favorable sector, though there will likely be some short-term softness in luxury demand. In the short-term, Class B and C properties will experience greater stress due to unsure incomes of lower wage workers. Senior housing is also facing immediate stress due to the concern for long-term demand. With COVID-19 affecting older-age seniors more than most other demographic segments, Senior housing is an area to watch with labor costs being extremely high.
There is some optimism that Congress will pass a massive fiscal and monetary stimulus package that will help the economy bounce back quicker. There appears to be financial assistance for small businesses coming soon. There even seems to be some forbearance of debt for struggling businesses. Despite all the market disruption and volatility, interest rates appear to be coming down and debt capital is still available.