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NAIOP August Coronavirus Impacts Survey Suggests Continued Gradual Improvement for CRE

Last week, NAIOP conducted its fifth monthly survey of its U.S. members on the impacts of COVID-19. Since April, the association has examined the pandemic’s effects on commercial real estate and how firms have responded. Respondents to the survey report continued, gradual improvement in rent collections, deal activity and conditions for ongoing development projects. However, their expectations for the duration of the pandemic remain virtually unchanged since July. 

The survey was completed by 210 NAIOP members between August 17-20, 2020. Respondents represent a range of professions, including developers, building owners, building managers, brokers, lenders and investors. 

Below is an overview of the survey results with direct quotes from the participants (in italics) followed by raw data from the survey and a profile of respondent characteristics. Results from July’s survey can be found here

Industrial, Office and Multifamily Sectors Continue Gradual Improvement 

Industrial, office and multifamily deals were slightly more common in August than in July, building on past improvement. For the first time since the outbreak began, a majority of respondents (57.1%) indicated they had witnessed new industrial development activity. Slightly fewer respondents reported seeing industrial building acquisitions than in July, but acquisitions activity nonetheless remained relatively high (reported by 86.6% of respondents). Respondents also reported an uptick in multifamily building acquisitions. Office development and building acquisitions were slightly more common in August than in July.  

What types of commercial real estate acquisitions or new development have you witnessed occurring in the last three weeks in the markets in which you are active?*

Industrial chart
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Office chart
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Multifamily chart
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*These charts combine data for acquisitions of completed buildings and those currently under construction. See the tables at the end of this post for additional data. 

Rent collections also improved moderately for office and multifamily properties, and more than 83% of office, industrial and multifamily building owners and operators reported that 90% or more of their tenants had paid their rent in full and on time. Respondents’ comments suggested variation in performance between different geographic markets and different firms’ portfolios. For example, one respondent observed an uptick in vacancies for 40,000-50,000 square-foot industrial properties in their market, while others indicated very low vacancy rates for their own industrial properties. 

What percentage of tenants in your properties have paid their rent in full and on time?* 

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*The survey asked what percentage of tenants had not paid their rent in full and on time by the 15th of each month. These charts display the difference between this percentage and 100%. 

Improvement in rent collections was also reflected in a decline in office and multifamily tenants requesting rent relief. The percentage of respondents indicating that 10% or more of their tenants had requested relief declined for both property types. By comparison, there was a small increase in the percentage reporting comparable relief requests among industrial tenants, though this percentage remained lower than in June, May or April (see chart below). 

What percentage of tenants in your properties have approached you regarding rent reduction or relief as of August 15?

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Building owners and operators continue to respond to tenant relief requests as in past surveys, with most (73.0%) offering tenants the ability to delay and amortize rental payments, though most (61.0%) ask tenants to provide financial information to demonstrate a need for relief. The survey revealed a decrease in the percentage of firms offering tenants rent relief in exchange for a longer lease (46.0% vs. 55.4% in July). However, a recent NAIOP Research Foundation brief suggests that tenants tend to be less interested in this option.  

All my clients are holding back [on] acquiring properties at this time. However, any projects that were in the works prior to COVID have been ramping up. 

The demand for industrial warehouse space has never been stronger and our portfolio is 97% leased. I wish I had more space. 

We received [fewer relief] requests than we expected. We have state and/or municipal eviction moratoriums through September 30th. The possibility that they could be extended is a concern. Courts remain closed. 

The Retail Sector Continues to Struggle 

As in previous surveys, retail deals where much less common than in other sectors, and deal activity in August reversed a trend of gradual improvement in the sector; 80% of respondents reported witnessing no retail building acquisition or development activity, up from 76.4% in July.  

Depressed deal activity reflects the ongoing difficulties that retail tenants face. As with deal activity, retail rent collections remained worse than in other sectors and reversed an earlier trend of gradual improvement. The percentage of respondents reporting that 90% or more of their retail tenants had paid their rent on time and in full declined from 20.0% to 17.8%, while those reporting that 50% or fewer of their tenants had paid their rent on time increased from 27.0% to 33.3% (see chart below). The pandemic’s persistence appears to have frustrated earlier hopes that retailers would experience a rapid rebound following the easing of state and municipal restrictions on business activity. 

What percentage of tenants in your properties have paid their rent in full and on time? 

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Easing Effects on Development Projects and Building Operations 

The August results reveal that the pandemic’s direct effects on ongoing development projects are easing. Fewer respondents reported a decline in leasing activity, delays due to on-site social distancing, worker absenteeism, government-mandated halts to construction, delays in financing or contractors going bankrupt or claiming force majeure (see chart below). However, delays in permitting and entitlements remain common (reported by more than three-fourths of respondents), and supplies shortages remain a persistent problem for a minority of respondents (see chart below).  

How has the coronavirus outbreak affected your current development projects?

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While building owners and operators continue to adopt individual safety measures at comparable rates as in past surveys, there was a sharp decline in the percentage reporting that they are closing properties for additional cleaning when a coronavirus infection is reported (24.5% in August vs. 37.2% in July). This decline may be due to fewer infections among building occupants; nationwide, the rate of reported daily infections was lower in mid-August than in mid-July

“As a permitting consultant, I remain reasonably busy as clients ‘bank’ approvals for new projects. Even so, normal operations will await widespread vaccination.” 

“Designing in ‘touchless’ buttons where possible, as well as UV light in ductwork.” 

Improved Expectations for Employment, but Not for the Length of the Pandemic 

Positive trends in deal activity and rent collections are mirrored by moderate improvement in respondents’ expectations for employment at their firms. August saw the highest percentage of respondents indicating they expect their firms to add new hires (18.6%) and the lowest percentage of respondents expecting staff reductions (9.6%) since NAIOP began conducting its Coronavirus Impacts Survey. The percentage of respondents indicating that they expect their firms to maintain current staff levels over the next three months has also grown gradually since April (see chart below). 

What adjustments to staffing does your firm anticipate making over the next three months?

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Despite several encouraging trends revealed in the survey, respondent expectations for the duration of the pandemic remain largely unchanged since July. Half of respondents expect the coronavirus to have a significant impact on their business operations for a year or less, while the other half expect the impact to last longer than a year. Comments from respondents suggest continued uncertainty about how long the virus will remain a significant public health concern and how it will affect the commercial real estate industry. 

How long do you expect the events associated with the coronavirus outbreak to significantly impact your business operations? 

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We continue to operate [at] 100% but manage the headcount in the office to 50%. 

We expect defaults and forbearance requests to increase over the next several months as the uncertainty in the market continues and tenant losses drag on. 

“Until there is a widely available vaccine, I do not expect to see normal business activity or office usage resume.” 

This is [likely] going to get worse. I expect to see changes in use and reductions in property values in the long term. Additional capital will be needed to support assets and ROI will be impacted.” 

Survey Results 

How long do you expect the events associated with the coronavirus outbreak to significantly impact your business operations? 

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How is the coronavirus outbreak currently affecting your development projects (select all that apply)? 

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What steps are you taking to improve the safety of your properties (select all that apply)? 

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What percentage of tenants in your properties have not paid their rent in full and on time as of August 15? 

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What percentage of tenants in your properties have approached you regarding rent reduction or relief as of August 15? 

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What steps is your firm taking when working with tenants to adapt to the outbreak (select all that apply)? 

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What types of commercial real estate acquisitions or new development have you witnessed occurring in the last three weeks in the markets in which you are active (select all that apply)? 

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What adjustments to staffing does your firm anticipate making over the next three months (select all that apply)? 

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Respondent Profile 

Which of the following best describes your primary profession? 

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Which of the following property types do you currently own or operate? For mixed-use properties, please select all uses that apply. 

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