NAIOP May Coronavirus Impact Survey Reveals Modest Improvement in Conditions for Development
Last week, NAIOP conducted its second survey of its U.S. members on how the coronavirus has affected their businesses and local markets. The survey results reveal the continued effects of the outbreak and how commercial real estate firms’ response to the outbreak has evolved since April. Although conditions are broadly similar to those in April, the results reveal a moderate rebound in acquisitions and new development and a modest decline in the outbreak’s effects on current development projects.
The survey was completed by 461 NAIOP members between May 18 and 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 key data from the survey and a profile of respondent characteristics. Results from April’s survey can be found here.
Improving Conditions for Development and Acquisitions
The outbreak’s effects on current development projects are slightly less pronounced than they were in April. A large majority of respondents still report delays in permitting or entitlements (62.3%) and lower leasing activity for current projects (57.2%) since the outbreak. However, except for a small increase in the share of respondents who reported delays in financing, the share of respondents reporting negative effects on current projects was lower for every metric measured than in April (see chart below). The most notable difference from April has been a sharp decline in the share of respondents who reported delays or shortages in construction supplies, from 31.1% to 19.1%. This may reflect a resumption in shipments of supplies from China.
Against this backdrop of modestly improving conditions for current development projects, it should be noted that state and local government mandates to halt construction remain an obstacle for about a third of developers (32.1%).
How has the coronavirus outbreak affected your current development projects?
Survey results also point to an increase in acquisition and development activity in industrial and multifamily properties. The proportion of respondents who reported witnessing new development in the industrial sector increased 7% in May, and those reporting acquisitions of existing industrial buildings or those currently under construction increased 5.3% (see chart below). The share reporting development of multifamily properties increased 4.7% and the share reporting multifamily acquisitions increased 10.4%. Increased acquisition and development activity in the industrial and multifamily sectors suggests that lending has begun to stabilize and that participants are more willing and able to price deals.
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?*
*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.
New office development remained virtually unchanged from April, but those reporting office building acquisitions declined slightly. Retail deals remained rare, with 85.6% of respondents reporting they had witnessed no deal activity in the last three weeks.
“Activity overall in industrial is good. Slower decisions in some cases. Financing for spec [is] difficult, but that is easing a bit over past week or two.”
“We have instituted floors and risk premiums in pricing. We are also working with counsel to incorporate Covid-19 guaranty language in loan documents to share potential risk with borrowers. Those guaranty requirements are tied to market metrics like unemployment, overall market vacancy, and government lock-down orders not being in force.”
Shifting Perceptions on Impacts to Business
More respondents expect the outbreak’s effects on their business operations will last longer than a year. Although a majority of respondents (54.5%) still expect the outbreak will have a significant effect on their business operations for a year or less, the share of respondents expecting this impact to last more than a year has grown, from 36.4% in April to 45.5% in May. This shift may signal that respondents expect the economic recovery to be more gradual than they did in April, or that they expect the coronavirus will remain a significant public health concern for longer.
How long do you expect the events associated with the coronavirus outbreak to significantly impact your business operations?
*Includes respondents who indicated “no impact.”
While still a small minority, a higher share of respondents expect that their firms will reduce staff (17.8% vs. 14.7% in April) or reduce staff hours (17.6% vs. 9.9% in April) in the next three months. A slightly smaller share of respondents (58.5% vs. 62.4%) expect their firms will ask some or all employees to telework in the next three months, suggesting that more commercial real estate firms will be transitioning back to the office. Fewer respondents (41.6%) indicated that their firms had applied for CARES Act loans than had been expected in April, when 48.8% of respondents indicated their firms were applying for or considering applying for these loans. When the April survey was first conducted, it was not yet clear that the Small Business Administration intended to exclude most real estate firms from qualifying for the loans. These criteria likely led some firms to avoid or return the loans.
“We envision this as a longer term issue until either a cure, vaccine or 90% herd immunity has been established. All of these we view as taking [place] in the +/- 18 months’ timeframe with tailing economic recovery impacts.”
“Because of the momentum Atlanta had hitting this sudden reduction of demand and even activity I believe we will come out of this downturn in six to twelve months. There will certainly be corrections in all sectors of the market but those were coming anyway and a great number of real estate professionals in our market were prepared for it.”
“We did actually receive CARES ACT monies, but after new guidelines were published, we chose to return the monies.”
Increased Adoption of Safety Measures
Results revealed increased adoption of most of the building safety and hygiene measures identified in the survey. The measure that experienced the largest increase in adoption was distributing hand sanitizer and disinfectants to tenants (now adopted by 52.5% vs. 39.9% in April). This may reflect greater availability of these products or that respondents have had more time to acquire them. Encouraging tenants to telework was the only measure that was less widely adopted in May than in April (18.4% vs. 30.3%), suggesting that a larger share of building owners and operators believe their properties can operate safely. However, the share of respondents who reported keeping properties closed due to state or local mandates remained almost unchanged at 29.6%.
What steps are you taking to improve the safety of your properties?
There were no significant changes in the strategies that building owners and operators are using when working with tenants to adapt to the outbreak. Delaying rent payments and amortizing them over the course of a lease, requesting tenant financials and adjustments to lease terms in exchange for relief remain the three most common strategies.
“We believe that there will be a further stratification in the quality of buildings, with those that meet the newer demands of tenants not only maintaining and attracting new tenants but will hold or have increases in rents and thus values compared to the properties that don’t meet the newer demands of tenants.”
NAIOP plans to conduct a follow up survey in June.
Survey Results
How long do you expect the events associated with the coronavirus outbreak to significantly impact your business operations?
How is the coronavirus outbreak currently affecting your development projects (select all that apply)?
What steps are you taking to improve the safety of your properties (select all that apply)?
What steps is your firm taking when working with tenants to adapt to the outbreak (select all that apply)?
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)?
What adjustments to staffing does your firm anticipate making over the next three months (select all that apply)?
Which of the following CARES Act benefits has your firm applied for (select all that apply)?
Respondent Profile
Which of the following best describes your primary profession?
Which of the following property types do you currently own or operate? For mixed-use properties, please select all uses that apply.
As NAIOP Research Director, Shawn Moura manages the NAIOP Research Foundation research committee and day-to-day operations of the Foundation’s research projects.
