Over the past few weeks, our world has completely changed–in our communities, our homes, and our places of work. COVID-19 has had an immediate impact on all of us. In the real estate community, we’re looking to understand how the pandemic is impacting the industry in the short term and what the long-term implications might be.
Like many, our team has been working from home for a few weeks now. During that time, we’ve had multiple conversations with real estate professionals around the country to gain consensus on the current situation. Here’s what we’re hearing from them and seeing in our own transactions:
New leasing has been spotty as some new and renewal lease transactions are closing, but others are being put on hold. Leasing activity has largely depended on the industry and use. For instance, technology tenants seem to be moving forward. Perhaps this is due to the fact that a mobile model of business is a relatively standard practice for them. Alternatively, businesses in the travel or hospitality industry are in lockdown mode.
One interesting phenomenon we keep hearing is the mutual agreement that folks can’t wait to get back to an office environment. It seems many underestimated the value of the collaboration, sociability, and efficiency an office environment offers, free from the distractions at home.
In a post-COVID-19 world, we may see a change in tenant space needs as companies work to allow for more space per square foot, per employee for personal and safety reasons. Pre-pandemic, the trend had been flowing the other way for several years, toward smaller footprints. However, the new focus on social distancing may help change this pattern. Other long-term space implications could include the modification of closed conference rooms, opening them up to create a lounge-type space that would allow employees more flexibility on how much room they choose to allow themselves between their co-workers in group meetings.
Most new sales efforts are being put on hold while owners opt instead to wait and see what implications COVID-19 has on the debt market and asset pricing. That said, those sale or purchase transactions that were already in the works are still closing or continuing their way toward closing.
Fundraising has continued to be encouragingly active as investors look for opportunity and diversification amidst volatile markets. Real estate has a relatively low correlation with the stock market and offers a good alternative investment, making it attractive as investors look to pivot from other investments.
Throughout our own asset portfolio across the country (office, retail, and medical office), we have been asked for some consideration from some of our tenants, with retail tenants exhibiting the most strain. Some tenants are having success utilizing the government resources available through the CARES Act, finding those loans are a viable option during this uncertain period. Specifically, the SBA Paycheck Protection Program is allowing tenants to access a loan from the Small Business Association to cover necessities, such as rent, for up to eight weeks.
Throughout the industry, we are seeing hospitality properties feel the most immediate impact, with retail and multi-family assets likely next in line.
Although most in the industry expected some type of correction in the markets, no one saw COVID-19 coming. That being said, market disruption – while uncomfortable and anxiety-producing – generally creates opportunity. Above all else, this has been the biggest takeaway in our conversations with real estate professionals across the country.
Jim Yoder is co-founder and principal at Velocis.