“People who used to dress up and go to work in offices are now working from home in pajamas, they like it” — Paul Ebeling
Commercial real estate owners, brokers and landlords have collectively made many hundreds of billions of dollars a year in recent years as the economy moved briskly.
Now, they are getting hammered by The China Act of War Virus driven economic chaos. And their industry may be forever changed by it.
Extracting rent from nearly anyone right now is problematic, and on the commercial side, the problem is dire. In addition to the countless small retail and restaurant businesses that have forced to close and vacate their commercial spaces because they can no long afford them, a growing number of corporate chains is also beginning to prove unwilling and/or unable to pay the rent.
The Big Q: What happens next?
The Big A: The landscape has changed Fassst in markets like San Francisco, Chicago, Boston and New York, where not only is there a density of independent shops and restaurants, but startup employees and other white collar workers are working from home, liking it and perfecting the art of distributed teamwork, as telecommuting happened as predicted.
That is not the trend CBRE or others in the Real Estate world were expecting this year.
An “outlook” report published by CBRE last November sounded rosy. “Barring any unforeseen risks,” it said at the time, “resilient economic activity, strong property fundamentals, low interest rates and the relative attractiveness of real estate as an asset class” suggested that Y 2020 would be a “very good year” for commercial real estate.
That Black Swan prompted shutdowns that have led to layoffs across nearly every sector of the economy. And by the very nature of it being a viral contagion made it very likely that when people are allowed to re-occupy commercial spaces, they will be less enthusiastic about dense workspaces.
So, whether the commercial real estate market comes all the way back after COVID-19 remains to be seen.
What is a Cap Rate and are there classifications therein?
“Capitalization rate (Cap Rate) is a formula used to estimate the potential return an investor will have on a real estate property. The formula calculates the ratio of the properties Net Operating Income (NOI) to Property Asset Value (PAV). The NOI value is usually the actual NOI of the property over the period of one year. The amount used for the PAV is often the asking sales price for the property or the purchase price the investor is expecting to pay for the property.
“Commercial Properties are typically classified into three Classes: Class A, B, and C. Also understand is that there is no one specific definition of what qualifies a property as Class A, B or C but each classification carries a different Capitalization Rate. Think of property Cass A as being properties with the highest quality, in the best location, or the newest conditions (recently renovated). Properties Class C are older properties, in less desirable locations, that can potentially require extensive renovation.
“Now there is a further element to understand that Cap Rates vary between Property Classifications and by geographical location so a Property located in the East might be totally different than in the Mid-West or West Coast. So, be careful for they vary based on yearly area economic conditions, but also by type of asset, age and condition of the assets versus its geographical location
These include the following:
- Multi-Family real estate assets: residential properties comprised of multiple separate housing units within the same building or a complex. Although duplex, triplex are fourplex are multifamily units, for our multi-family category, we include properties with more than four residential units.
- Retail real estate assets: grocery stores, pharmacy stores, drug stores, supermarket stores, convenience stores, corner stores, restaurants, service stations, gas stations, retail gallery, free-standing retail buildings, freestanding restaurants and fast food restaurants, bars, bank buildings, coffee shops, showrooms, storefront, daycare facility, and other retail establishments.
- Shopping Center real estate assets: shopping centers, shopping plaza, strip centers, strip malls, outlet centers, factory outlets, community centers, regional malls, health clubs, auto repair, super regional Malls, mixed-use shopping centers and lifestyle shopping centers, and other shopping center type properties.
- Industrial real estate assets: distribution centers, light industry, heavy industry, manufacturing facilities, office and industrial building, R&D facilities, flex facilities, warehouses, distribution and bulk-distribution centers, and other industrial type properties.
- Office real estate assets: single and multi-tenant office buildings, corporate office buildings, office malls, industrial and campus office parks, medical and healthcare offices, office and storefront retail, loft and creative office space, live and work unit and other office type properties; and
- Specialty real estate assets: amusement park, assisted living, baseball field and other sport centers, car wash, casino, congregate senior housing, continuing care, golf range, horse stables, hospital, rehabilitation center, marina, parking, religious facility, schools and university, self-storage, skilled nursing facility, race track, retirement community, skating rink, swimming pool, theater and concert hall.
Given all of the above, what is the general consensus about commercial real estate and their respective capitalization values?
“ Broadly speaking capitalization values are going down which means that they are going from an average 2.5% for Class A Properties in New York City and Los Angeles to 6.5% for San Antonio. However, they are being somewhat buoyed by the fact that their operating costs are being more closely monitored, including financing costs, which are going down.
“Keep in mind that caution is needed in finding investment opportunities, given all of the above, and the fact that the commercial real estate market is focusing more on the work-at-home style than being located at the commercial property itself. Further, most industry specialists do not expect this trend to reverse itself until the covid-19 pandemic reverses itself and even then, the stay-at-home work, pajamas and internet ordering economy has and is continuing to gain significant momentum,” says real estate expert, Bruce WD Barren, and regular editorial contributor to Live Trading News.
Have a healthy weekend, Keep the Faith!
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