NAIOP June Coronavirus Impacts Survey Results Show Improving Conditions for Commercial Real Estate
Last week, NAIOP conducted its third survey of its U.S. members on how the novel coronavirus has affected their businesses and local markets. The survey examines the outbreak’s effects on conditions in commercial real estate and evaluates how firms have responded. The June survey results reveal that development conditions have continued to improve since May.
For the first time, NAIOP is publishing data it has collected on rent payments and tenant requests for rent relief over the last three surveys. As with other metrics, these data reveal gradual improvement in market conditions since April.
The survey was completed by 351 NAIOP members between June 15 and 17, 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 May’s survey can be found here.
Continued Improvement in Conditions for Development and Acquisitions
Most of the outbreak’s effects on current development projects continue to soften. Two-thirds of respondents (66.1%) continue to report delays in permitting or entitlements since the outbreak, but other measures continue to improve (see chart below). Most notably, fewer respondents report a decline in leasing (49.4% vs. 57.2%) or delays in financing (16.1% vs. 23.3%) than they did in May. Local government restrictions on construction have also eased, with less than one-quarter of respondents reporting a mandatory halt, compared with about a third of respondents reporting mandated halts in May.
How has the coronavirus outbreak affected your current development projects?
Improved leasing and financing conditions are also likely contributing to increased development and acquisitions activity. The proportion of respondents who reported witnessing industrial, office and multifamily building acquisitions increased from May, and reported industrial and multifamily development activity also improved (see charts below). Industrial remains the strongest sector for reported activity, with the share of respondents observing new industrial development more than doubling since April (from 18.5% to 43.2%) and 70.7% of respondents witnessing industrial building acquisitions. Reported multifamily building acquisitions were also up sharply since May (from 35.6% to 49.1%). Reported office building acquisitions have improved modestly since April (from 32.6% to 37.1%), though new office development remains relatively uncommon. Retail development and acquisitions activity remains relatively uncommon, with 79.6% of respondents reporting that they witnessed no retail deals in the last three weeks (see the end of this post for detailed survey results regarding retail).
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.
“The industrial market is continuing to strengthen rapidly [and] we’re optimistic the market will continue to strengthen. The difference in market dynamics in the past 30 days is amazing.”
“Lenders are now very conservative in the underwriting and structuring of transactions, which will continue for at least the next 12 months.”
“Many institutional investors have not changed their return requirements, but they want to get those same returns by taking less risk. On the family office/private side, some are still moving forward with reasonable yield expectations, others have increased their yield requirements on the basis of relative value.”
June survey results also revealed an uptick in optimism about the duration of the outbreak’s effects. In May, we observed that there had been an increase in the proportion of respondents who expected that the outbreak would significantly affect their business operations for more than a year. That trend did not continue into June. Instead, a smaller share of respondents expects these effects to last more than a year, although that expectation remains more common than it was in April. Comments from survey respondents suggest that expectations for the severity of the outbreak’s effects may vary from state to state.
How long do you expect the events associated with the coronavirus outbreak to significantly impact your business operations?
“We are pleased to see Florida restoring business activity in phases, but we are alarmed at the number of new COVID-19 cases. Still facing a lot of uncertainty.”
Rent Collection and Tenant Relief
Survey results reveal improved rent collection rates since April. Large majorities (69-74%) of respondents reported on-time payments by 90% or more of their office, industrial and multifamily tenants in June. NAIOP began collecting data on rent collections in the April survey, and is releasing it with this month’s results now that we have three months of data for comparison. These data reveal improving rent collection rates across office, industrial, multifamily and retail tenants.
Across all three surveys, a majority of respondents reported that 90% or more of office, industrial and multifamily tenants paid their rent in full and on time. For these three property types, collection rates improved in May, with relatively minor differences in collection rates between May and June (see charts below). Since respondents own or manage differently-sized portfolios, survey data only provide an indirect measurement of late payment rates, but the distribution of responses suggest it is likely that average late payment rates were below 10% for these three property types in June.
Respondents reported substantially lower on-time payment rates for retail tenants in all three surveys. Retail rent collections improved in May and June. Nonetheless, 69.9% of respondents reported that 75% or fewer of their retail tenants had paid their rent in full and on time in June.
What percentage of tenants in your properties have paid their rent in full and on time?*
*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%.
NAIOP also asked respondents what percentage of tenants in each property type had requested rent reduction or relief. The data from this question closely tracked reported late payment rates (detailed data are listed in the full survey results at the end of this post). The percentage of respondents reporting tenant requests for relief declined across all property types from April to June. Requests for relief are least common among multifamily tenants and most common among retail tenants.
What percentage of tenants in your properties have approached you regarding rent reduction or relief as of June 15?
A majority of building owners and operators continue to offer tenants relief by delaying and amortizing rental payments or adjusting lease length in exchange for rent relief, but expect tenants to provide evidence of financial hardship. The proportions of respondents reporting these practices have changed only slightly since April. By comparison, other practices, such as asking tenants about business interruption insurance or helping tenants to apply for benefits provided by government programs, have become slightly less common. The June survey results reveal a slight increase (from 26.2% to 32.5%) in the percentage of respondents who had lowered a tenant’s rent or offered them free rent periods. This may suggest a decline in effective lease rates in some markets.
What steps is your firm taking when working with tenants to adapt to the outbreak?
“We are doing workouts with all retail tenants and about 10% of office tenants. The most needy are restaurant tenants and nail salons. We have abated one month for all retailers and two months for restaurants, deferring the remainder of rent either three years or through lease term, whichever occurs first.”
“Relief in the form of rent deferrals is common but many tenants were anticipating abatement.”
Employment Conditions Continue to Improve
Employment conditions in the commercial real estate industry appear to have improved since May. More respondents now expect their firms to maintain current staff levels and hours over the next three months (65.8% vs. 59.6%) and there have been moderate declines in the percentage of respondents that expect reduced staff counts, reduced hours or reduced compensation (see chart below). While most respondents still indicate they expect their firm will ask some or all employees to telework, the percentage holding this expectation continues to decline, suggesting that commercial real estate firms’ offices are gradually reopening.
What adjustments to staffing does your firm anticipate making over the next three months?
“Although we have not furloughed any of our 3,500 employees, our business is now down 25% from a high of 50% as the economy re-opens. We have had 3 active COVID cases which caused us to quarantine approximately 25 people for a period of time. Financial impact of paying people during their quarantine was approximately $75K.”
“We have maintained all our staff [and] allowed a few who requested it to continue to work from home. [We] limited staff in the office to 25% as some staff work between two offices. We have provided all the PPE for our employees and set up the office for social distancing.”
June data on the adoption of building safety measures were broadly similar to those from May. A majority of building owners and managers continue to report more frequent cleaning, distributing hand sanitizer and disinfectants to tenants and closing amenities in common areas. Slightly more respondents in June (21.4%) reported screening visitors for coronavirus symptoms than in May (17.0%). Fewer respondents reported closing properties due to state or local mandates (22.5% vs. 29.6% in May), suggesting that more buildings have been able to reopen as government restrictions ease. There was also a decline in the percentage of respondents who reported closing properties for additional cleaning when an occupant or visitor reported testing positive for coronavirus (24.7% vs. 33.2%). This may indicate a decline in the rate of tenant-reported infections, or that more building owners have developed alternative measures to sanitize an area that do not require closing an entire building.
“Occupants who telework are not looking for rent relief and their business operations are stable. Likewise, [we are] encouraging internal employee telework situations for all non-maintenance or on-site asset based services, [and are] continuing to see excellent productivity, engagement and work output from employees.”
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 percentage of tenants in your properties have not paid their rent in full and on time as of May 15?
What percentage of tenants in your properties have approached you regarding rent reduction or relief as of ______ [see below for dates]?
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 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.
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