NAIOP September Coronavirus Impacts Survey: Deals Continue, but Challenges Persist

Last week, NAIOP conducted its sixth 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 deal activity, but also indicate that the coronavirus is having a more pronounced effect on ongoing development projects than in prior months. In addition, more building owners are responding to the outbreak by offering tenants a broader range of rent relief arrangements and by increasing building safety precautions.

The survey was completed by 203 NAIOP members between September 15 and 18, 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 participants (in italics) followed by raw data from the survey and a profile of respondent characteristics. Results from August’s survey can be found here. Note that charts in this analysis illustrate data from the three most recent surveys. Data from the April-June surveys are published in earlier posts.

Acquisition and Development Activity Continue to Improve

More respondents reported witnessing industrial, office and multifamily deals in September than in August, continuing a trend toward greater activity. Industrial properties continue to attract more deals than other property types, with an uptick in the percentage of reported acquisitions of existing buildings and buildings under construction. More respondents also reported office and multifamily building acquisitions and both sectors experienced a slight increase in reported new development activity. Deal activity for industrial, office and multifamily properties has improved substantially since April, when nearly half of respondents reported seeing no industrial deals and two-thirds reported no office or multifamily activity. Retail properties continue to attract the least interest from investors, with 79.8% of respondents reporting no deal activity in the sector.

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
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“We have seen continued demand for multifamily and industrial product, both from investors and from lenders. These are the top two categories, followed by investment-grade credit single- tenant NNN properties with good lease term remaining. The debt markets are open for business with the agencies (Freddie Mac and Fannie Mae) continuing to propel the multifamily space and insurance companies have expressed a desire to get more capital out in 2020, as many are well behind their stated goal after a slow second quarter. With interest rates expected to remain low, it should present some excellent buying opportunities for investors.”

Rent Collections and Relief

The survey reveals moderate improvement in retail rent collections, modest improvement in industrial collections and a minor setback in office collections. Overall, rent collection rates for retail properties remain much lower than for other commercial property types, with less than a quarter of respondents reporting that more than 90% of their retail tenants had paid their rent on time and in full. However, the ratio of respondents who reported that half or fewer of their retail tenants had paid on time improved substantially, dropping from one-third to one-fifth of respondents. Industrial rent collections improved slightly, with 90.4% of respondents reporting on-time collection rates of 90% or more. Office rent collections experienced a minor setback, with only 74.1% of respondents reporting 90%+ on-time collections, vs. 83.4% of respondents in August. Multifamily rent collections remained strong, but largely unchanged since August.

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

Office and industrial
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Multifamily and retail
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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%.

Survey data also suggest that building owners and managers are fielding more requests for rent relief from non-industrial tenants. Office properties experienced the sharpest increase in rent relief requests, with the ratio of respondents reporting requests from more than 10% of their office tenants increasing from 25.4% in August to 37.7% in September.

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

% of respondents indicating tenants had requested relief
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More building owners appear to be adapting to the duration of the pandemic by offering longer-term rent relief options to tenants. Delaying rent payments and amortizing them over the remainder of the lease remains the most common form of rent assistance, offered by 72.6% of building owners and managers. However, 61.3% of respondents now report offering tenants rent relief in exchange for a longer term (up from 46.0% in August), and 48.1% report offering rent adjustments (up from 34.0% in August). These changes may indicate that tenants need longer-term arrangements than a deferral can provide. Some building owners may also be offering tenants additional forms of rent relief to maintain occupancy rates in a softening rental market.

The Pandemic Remains a Major Concern for Current Projects and Building Operations

Ongoing development projects continue to experience complications, lost revenues and delays due to the coronavirus. Delays in permitting and entitlements remain a widespread problem, reported by 72.0% of respondents. Almost half of respondents still report a decline in leasing activity compared with before the pandemic. Although delays due to on-site social distancing have declined in recent months, a record-high percentage of respondents (42.0%) reported supplies shortages, and respondents reported delays due to worker absenteeism or shortages at rates similar to those in April (32.0%, vs. 34.7% in April).

How has the coronavirus outbreak affected your current development projects?

How has the coronavirus outbreak affected your current development projects?
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More respondents also report taking additional measures to increase building safety. Increased cleaning, communicating hygiene and safety guidelines with tenants, distributing hand sanitizer and disinfectants, and closing common areas remain the most common safety measures, and are reported at rates similar to those in August. However, additional measures are now more common. 37.1% of respondents report closing properties for additional cleaning when an occupant reports testing positive for coronavirus, up from 24.5% in August. One-quarter of respondents report banning visitors who are not tenants, while another quarter report screening visitors for coronavirus symptoms, both up from August. Increased adoption of these three measures may indicate an increase in concern about infection risks in some markets.

“There was an initial retraction; however, I think development of most property types (not office) is back to normal with a few delays. In Minnesota, some developments were pushed to spring as the developers did not budget for winter conditions.”

“[We are] increasing air flow, using MERV 13 filters, increasing HVAC run times, [and adding] enhanced outdoor areas, touchless entry systems.”

Outlook and Employment

Respondents are slightly more optimistic about employment at their firms, even though their expectations for the duration of the pandemic’s effects on their business operations have not changed much in recent months. Of those surveyed, 23.2% of respondents expect their firms will add new hires over the next three months, the highest percentage recorded since the survey was first conducted in April. On the other hand, respondents remain almost evenly divided on whether the pandemic will significantly affect their business operations for more than a year, with 46.8% now holding this view.

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

What adjustments to staffing does your firm anticipate making over the next three months?
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How long do you expect the events associated with the coronavirus outbreak to significantly impact your business operations?

How long do you expect the events associated with the coronavirus outbreak to significantly impact your business operations?
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Respondent comments about future industry conditions were mostly negative, with some respondents noting that they also expect other factors – such as the results of the upcoming election or wildfires – to affect demand for commercial real estate. However, it should be noted that only a small minority of respondents offered commentary on their expectations for the commercial real estate industry.

“The impact of COVID will be felt until 2022.”

“I’m aware of [views] from counterparts and friends in different segments, [that] are indicative of the most dichotomous array of expectations I’ve ever seen or encountered in my 30-plus years, from ‘business as usual’ to ‘haven’t even felt it yet, but very concerned about 2021’ […] to ‘worse than 2008-09!’”

“The impact of the virus, social unrest and wildfire concerns will have a long-term impact on components of West Coast real estate markets.”

“Still many people out of work and that will filter down to spending habits pretty quickly. I think it gets worse before it gets better. Real estate is a lagging industry and I think we will see declines in value.”

“As a lender, it seems that the market will only get worse. More and more borrowers are reporting [that] tenants are downsizing and requesting to break leases, sublet or give back space in office and retail properties. The effects of this can only get worse as new properties are delivered to market and companies realize that their employees are just as effective working from home.”

Work Arrangements for Parents

In this month’s survey, we also asked respondents a supplemental question about work arrangements for parents with minor children. Most respondents indicate that their firms allow parents to telework as needed (72.5% of respondents) and offer parents flexible work schedules (65.6%). Offering employees a dependent care FSA and adjusting work roles to defer or suspend non-critical work were much less common, reported by 6.9% and 9.5% of respondents, respectively. Only one respondent reported that their firm offered on-site child care facilities. A small minority (16.4%) also reported that their firms were not adjusting schedules or roles, but would consider doing so if local conditions changed.

Survey Results

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

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)?

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)?

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 September 15?

What percentage of tenants in your properties have not paid their rent in full and on time as of September 15?
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What percentage of tenants in your properties have approached you regarding rent reduction or relief as of September 15?

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

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)?

What adjustments to staffing does your firm anticipate making over the next three months (select all that apply)?
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Is your firm taking any of the following measures to provide additional support for employees with minor children (select all that apply)?

Is your firm taking any of the following measures to provide additional support for employees with minor children (select all that apply)?
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Respondent Profile

Which of the following best describes your primary profession?

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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