There is a Real Crisis in the Commercial Real Estate Sector Driven by the Coronavirus

There is a Real Crisis in the Commercial Real Estate Sector Driven by the Coronavirus

In just a few weeks, the lives of The People have changed in ways they had never imagined.

People can no longer meet, work, eat, shop, and socialize as they used to.

The working world moved rapidly from business as usual to cautious travel, office closures, and work-from-home mandates.

Instead of traveling and going out to eat at restaurants, consumers across the world are tightening their purse strings to spend only on essentials: food, medicine, and home supplies, they are having these delivered and not driving to the stores.

Physical distancing has changed the way people inhabit and interact with physical space, and the knock-on effects of the virus outbreak have made the demand for many types of space shrink, for the 1st time in modern history.

This has created an unprecedented crisis for the real estate industry. Beyond the immediate challenge, the longer this crisis persists, the more likely we are to see transformative and lasting changes in behavior.

To respond to the current and threat of COVID-19 coronavirus, and to lay the groundwork to deal with what may be permanent changes for the industry after the crisis, Real Estate leaders have to act now.

Many will centralize cash management to focus on efficiency and change how they make portfolio and capital expenditure decisions.

Some will feel an even greater sense of urgency than before to digitize and provide a better tenant and customer experience. And, as the crisis affects commercial tenants’ ability to make lease payments, many operators will need to make thousands of decisions for specific situations rather than making just a few, broad-based portfolio-wide decisions.

Most commercial Real Estate owners and managers have begun with decisions that protect the safety and health of all employees, tenants, and other end users of their space.

The smartest will now be thinking about how the Real Estate landscape may be permanently changed in the future, and will alter their business strategies.

Those that succeed in strengthening their position through this crisis (if they do) will go beyond adapting, they will have taken bold actions that deepen relationships with their employees, investors, end users, and other stakeholders.

The challenge: Over the past several years, Real Estate investments have generated steady cash flow and returns above traditional sources of yield with just slightly more risk.

Since the coronavirus outbreak this scenario has changed, and Real Estate’rs have been hit hard across the value chain.

Service providers are struggling to mitigate health risks for their employees and customers.

Developers cannot obtain permits and they face construction delays, stoppages, and potentially shrinking rates of return.

Meanwhile, many owners and operators face drastically reduced operating income, and almost all are nervous about how many tenants will struggle to make their lease payments.

Concessions & Abatement are the Key words today, and managers are working rapidly to figure out for whom they apply and how much if not all.

Not all Real Estate assets are performing the same way during this health crisis. The market looks to have pivoted mostly on the inherent degree of physical proximity among users, even more so than on its lease length.

Properties with greater human density have been hit the hardest: healthcare facilities, regional malls, lodging, and student housing have sold off considerably.

By contrast: self-storage facilities, industrial facilities, and data centers have faced less-significant declines.

As of 3 April, by 1 estimate, the unlevered enterprise value of Real Estate assets had fallen 25% or more in most sectors and as much as 37% for lodging. 

It is no surprise then that when shoppers avoid crowds, universities and colleges send students home, and retailers, restaurants, and hotels close their doors owning and operating such properties is a very much less valuable proposition. And so liquidity and balance-sheet resilience are the Key priority.

The COVID-19 coronavirus experience could permanently change people’s habits that could well affect demand for Real Estate assets, such as hospitality properties and short-term leases.

Even a short moratorium on business travel will have lasting impact when alternatives such as video conferences prove sufficient or even preferable. Nearshoring of supply chains may further reduce demand for cross-border business travel, and consumers who are afraid of traveling overseas may shift leisure travel to local destinations.

Fear is a factor.

Consumers forced to shop online may permanently adjust their buying habits for certain categories toward e-Commerce.

Before this health crisis consumers were already shifting their spending away from brick and mortar stores. This long-term trend may accelerate after this crisis. Within certain product categories where supermarkets or mainstream retailers compete with online retailers, substantial market share could transfer to online merchants.

The list goes on and on and on…

The full economic impact on the Real Estate sector is uncertain, just as the scale of human pain from this health crisis is yet to be seen.

There will be behavioral changes leading to significant Real Estate asset space becoming obsolete in a post-coronavirus environment.

Given the potential for major transforming changes, commercial Real Estate participants will be well served to take immediate action to improve their businesses, but also keep focused on a very different future.

My analysis tells me that Real Estate usage will change going forward. And that rather than relying on traditional economic or customer-survey-driven approaches, Real Estate leaders are looking to psychologists, sociologists, futurists, and technologists for answers. BTY these changes were predicted in the late 1970’s by futurist Alvin Toffler in Future Shock and The Third Wave.

The looming Big Qs: Will employees demand larger and more enclosed workspaces, will people decide not to live in condominiums for fear of having to ride elevators? ++++++

Some companies have closed their commercial offices and become virtual with no Headquarters, more will follow, as the executives move to the country away from the masses.

Uncertainty reigns in here, but by employing a range of creative personnel and using new methodologies business leaders may find new and more predictive insights.

Humans are very creative, and within a major crisis lies great danger and greater opportunities.

I believe that the behavioral changes that come about will outlive the coronavirus…

Have a healthy week, stay home, Keep the Faith!

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge. Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he it the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.