On Tuesday, NAIOP hosted a webinar, “COVID-19’s Impact on CRE: What We Know Today (and Don’t),” to help real estate professionals navigate the challenging business environment generated by the COVID-19 pandemic.
Q: Are there any retail trends that you see becoming permanent because of the coronavirus outbreak?
Al Pontius, national director of office and industrial, Marcus & Millichap: There will very likely be concepts or at least the amount of units that shrink because of this. But simultaneously, there will be growth sectors or opportunities emerging that we’re not contemplating right now.
I don’t mean to be completely even keeled, but retail has been a rapidly morphing area for years. It’s certainly logical to assume that what we’re learning and acclimating to in the online world is going to push change going forward. But many retailers have already determined the existence of physical locations in concert with online presence has been the best formula to drive activity. That morphing will continue, but it’s too early to say if it will be any more significant than its natural course.
Q: What about office trends that you see becoming permanent?
Pontius: From the office point of view, you can certainly see the logic of working from home. Does that become the future and space demand falls off the ledge? I see a counterpoint that’s equally strong: While we might want the flexibility of telecommuting, we’re all learning that we miss our communities. … I’m suggesting that there is a very strong counterweight to the idea that we’re all going to work from home in the future. Certainly the flexibility to do so is increasing, but it’s a little early to say.
Q: What about industrial trends?
Pontius: On the industrial side, the longer-term view looks stronger. E-commerce is more relied upon because of this experience. You’ll see companies reconsider mechanisms in their supply chain to make sure that major disruptions are muted in the future. That bodes well for industrial in the long term.
In the short term, there are going to be businesses that are hurt by the economic scale-back. That’s going to shrink space demand in the near term. It may cause some businesses to fail. The level of government support is going to play a major role in that. But in the longer term, I feel we have an excellent chance to get back to normal conditions in the not-too-distant future. But to get there, collectively as a society we’re going to have to flatten the curve to reduce the coronavirus threat through social distancing and other measures.
Q: Have any sales been transacted in the past two weeks?
Pontius: There’s no question that there are transactions being put on pause. The overall transactional environment in the short term cannot help but slow down. But there are absolutely transactions occurring. There is liquidity.
The private investor – somebody investing their own capital as individuals or family offices – ranges in net worth from small to very large. The private investor is generally more active than institutional investors, who are more in a watch-and-see mode.
Obviously, the logistics of getting people together for deals is challenging right now.
If we’re offering security, safety and the long view, it’s a combination of credit and term that is liquid today. At times like this, the investor base tends to flock to the safer option. That’s a combination of credit and term – certainly in a single-tenant application but also in a multiple-tenant application where those factors exist.
There’s always the property that hasn’t come to market in a long time, so this might be the only opportunity to make a play. And where scarcity and quality apply, that will factor into the decision.
It remains to be seen how much property will be in distress. So far, we haven’t seen any meaningful volume in distress.
We’re going to see overall some degree of reduction in transaction flows as different investors hit the pause button, but there are others looking at it as a period to look more keenly on opportunities when the crowd may have thinned somewhat.
Any feedback on what CMBS servicers are doing for debt-relief requests on existing loans that have lost tenant income, or are they just going to start cash sweeps?
Pontius: I think everybody is going to be forced to evaluate situations and try to work through things. I think we’re going to have some interventions, and I think you’re going to have the recognition that the outcome might be faster and better if everybody works together through this clearly challenging time to get through it.
Q: Any feedback to how ground-up construction lenders are reacting to the situation?
Pontius: Only if it’s a build-to-suit already buttoned up in terms of the lease and crystal clear about commitments and obligations. Short of that, speculative construction is going to come to a massive slowdown. The challenge is evolving rapidly. The more variables involved, the more you’re going to put a pause on that type of construction.
John Chang, national director of research services, Marcus & Millichap: Construction is currently being considered a critical job in most markets, so those people are being allowed to go to work, even in states with a lockdown. That can always change, though. The projects in process are going to run into more logistics challenges, including access to materials.
As for future developments, a lot of those are likely to be put on hold as the developers and investors take a wait-and-see approach. We do expect a slowdown across all property types as we roll forward.
Q: How do you see supply chains being impacted in the future? Will there be a need for redundancy in the supply chain?
Pontius: If you are being dramatically disrupted as a business right now because of supply chain considerations, you’re going to look to mitigate that risk from returning in the future. You’re clearly going to see backup plans and by some margin, this is going to have another net positive increase on industrial demand in the U.S. This is going to have to be addressed. It is highly disruptive. Not that the currently supply chain will be eliminated; there will be workarounds created to ensure that the level of impact will not be the same.
Trey Barrineau is the Managing Editor, Publications for NAIOP. In this role, he supervises day-to-day operations of Development magazine.