NAIOP’s July Coronavirus Impacts Survey Results: CRE Continues to Recover
Last week, NAIOP conducted its fourth monthly survey of its U.S. members on the impacts of COVID-19. Since April, the association has examined the pandemic’s effects on conditions in commercial real estate and evaluates how firms have responded. The July survey results reveal that commercial real estate fundamentals are improving, but that the pandemic continues to impact development projects and appears likely to remain a significant challenge for longer than many had initially expected.
The survey was completed by 347 NAIOP members between July 15-20, 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 June’s survey can be found here.
Continued Growth in Development and Acquisitions Activity
July continued a trend of positive growth in reported industrial, office and multifamily building acquisitions activity, with more respondents reporting having witnessed these deals than in previous months (see charts below). The increase in building acquisitions activity was most notable for industrial properties, with 92.6% of respondents witnessing these acquisitions in July, compared with 70.7% in June. Reported development activity also increased for industrial, office and multifamily properties in July, with the first significant increase in office property development since the April survey (16.5% of respondents reported new office development in July vs. 8.5% in June). Although increased office activity suggests the sector is improving, these deals remain uncommon in many markets, with a slight majority of respondents (52.2%) having witnessed no office deals in the last three weeks. Retail property deals remain uncommon, with 79.6% of respondents witnessing no new retail acquisitions or development.
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.
“Overall, most seem bullish on industrial. Institutional partners have paused new investments, but private groups are still active and wanting to push further into industrial space. Steady activity with some delays in decision making.”
“I primarily work the industrial sector and it has been very busy. E-commerce is alive and well.”
Rent Collections Continue to Improve
Improving rent collections suggest that the increase in deal activity may be supported by improving fundamentals. More than three-quarters of office, multifamily and industrial building owners and operators report that 90-100% of their tenants had paid their rent in full and on time in July. Reported rent collection rates for these property types have gradually improved since April (see charts below). This trend suggests that tenant financials have been recovering, though it remains to be seen how rent collections will fare when federal relief programs such as expanded unemployment benefits and PPP loan disbursements come to an end. Retail property rent collection rates also improved in July, but the sector continues to struggle, with 51% of respondents reporting that 25% or more of their retail tenants had not paid rent in full and on time as of July 15.
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%.
A decrease in the percentage of respondents reporting that 10% or more of their office or industrial tenants had requested some form of rent relief also suggests that business conditions have improved for these sectors (see chart below). Slightly more respondents reported that at least 10% of their multifamily tenants had requested rent relief, which may be a reflection of continued high unemployment rates. A large majority (88.0%) of respondents report that more than 10% of their retail tenants have requested relief, though this percentage has declined slightly from past surveys.
What percentage of tenants in your properties have approached you regarding rent reduction or relief as of July 15?
There has been little change in how building owners and operators address these requests, with respondents reporting that identified methods for working with tenants were as common in July as they had been in June. Offering tenants the ability to delay and amortize rent payments or abate rent in exchange for a longer lease remain the most common forms of relief (adopted by 77.5% and 55.4% of respondents, respectively) and most respondents (71.1%) continue to request that tenants provide them with financial evidence that they need assistance. Comments from lenders who completed the survey suggest that many building owners are also obtaining lender assistance to help offset reduced rental income.
“We service 5,500 loans on commercial and multifamily properties for life insurers and others. Over 1,100 have requested relief with about half being granted relief. Typical is a four- to six-month interest only period. For some, four to six months of full payment forbearance is granted (hotels). We expect a new wave of requests as all is not well.”
Respondents Expect Longer Impact Amid Delays
Although commercial real estate fundamentals generally appear to be improving, more respondents now expect the outbreak’s effects on their businesses to last longer than in previous months. Exactly half (50.0%) of respondents now expect the coronavirus will impact their business operations for more than a year, compared with 39.7% of respondents in June and only 36.4% of respondents in April. This increase in pessimism about the duration of the pandemic may in part be a reaction to rapid growth in the number of reported COVID-19 cases across the U.S. since June.
How long do you expect the events associated with the coronavirus outbreak to significantly impact your business operations?
This shift in sentiment also comes as more developers face delays in permitting and entitlements, delayed financing, supply shortages and contractors declaring force majeure or filing for bankruptcy as a result of the pandemic. The increased frequency of these disruptions is a reversal of earlier trends that had generally shown improving conditions for current development projects since April. Although slightly fewer respondents reported state or local government-mandated halts to construction, nearly a quarter of respondents (22.0%) indicate this remains a problem. The persistence of disruptions associated with the pandemic is likely leading some developers to extend their expectations for how long the coronavirus will affect their operations.
How has the coronavirus outbreak affected your current development projects?
“2020 and 2021 economic uncertainty is creeping into the picture when companies are making decisions on new locations.”
“The optimism we experienced recently when restrictions were somewhat lifted has disappeared.”
“The pandemic will transform most types of CRE including offices, hospitality, rental housing for families and assisted living. Very few sectors won’t be facing transformational pressures caused by the pandemic and [its] economic impacts.”
“Several lenders have indicated they would not underwrite any rent related to a tenant that got relief during the pandemic. Others will not look at retail deals. There is a large disconnect between being open for new loans and what borrowers need in a loan.”
Building Owners Respond to Growing Safety Concerns
Respondents reported adopting a range of safety measures at rates that were broadly similar to those in June. The most common measures remain increasing the frequency of cleaning, communicating hygiene and safety guidelines to tenants, closing common amenity areas and distributing hand sanitizer and disinfectant to tenants (complete data are available at the end of this post).
There was a slight increase in the percentage of respondents who reported distributing hand sanitizer and disinfectant (61.3% in July, up from 55.0% in June). While less common, there was also a significant increase in the percentage who reported closing properties for additional cleaning when an occupant reported a coronavirus infection. Over at third of respondents reported this measure in July, compared to one-quarter of respondents in June. This increase may suggest that a larger number of properties have received reports of an infection, or that more building owners have adopted rigorous measures to respond to these reports.
In addition to safety measures tracked by the survey, some respondents indicated they were investing in related capital improvements.
“Adding UV lighting and upgraded filtering to our HVAC systems.”
“[We] upgraded filters in building HVAC systems, asked our largest tenants to stagger arrivals and departures, [and are] making high traffic areas more touchless (i.e., automatic doors and Bluetooth elevator call buttons).”
Little Change in Employment Conditions
Improving rent collections and deal activity appear to have counteracted any increase in pessimism about the duration of the pandemic when it comes to employment decisions. July survey data pertaining to respondents’ employment expectations over the next three months were very similar to those from June, with 66.9% of respondents expecting their firms will maintain current staff levels, 14.6% expecting staff reductions, and 14.9% expecting their firms will add new hires.
“We are still filling key open positions, so we are hiring. But we have eliminated a handful of redundant positions and approximately 50% of our salaried support positions are working reduced hours (32 hours a week).”
“Many of our properties are vacant and companies are keeping workers at home. [We are] negotiating savings with maintenance staff to keep their employees, but reduce our costs.”
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 percentage of tenants in your properties have not paid their rent in full and on time as of July 15?
What percentage of tenants in your properties have approached you regarding rent reduction or relief as of July 15?
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)?
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.
