Developers, lenders, appraisers, contractors, asset managers, attorneys, and many other professionals have been slammed daily with a barrage of challenges and requests.
By Greg Winchester – Head of Industry and Alumni Relations and Adjunct Professor, Auburn University Master of Real Estate Development Program
May 8, 2020
It’s been over a month since the double black swan events of Covid-19 and the great oil war have broadsided the U.S. and world economy. Since then the U.S. commercial real estate industry has gone from a fully priced and “risk on” market to an abrupt halt with major players and professionals assessing the impact on planned and existing projects.
Developers, lenders, appraisers, contractors, asset managers, attorneys, and many other professionals have been slammed daily with a barrage of challenges and requests. The current environment has led to an industry-wide scramble to maintain normal business activities. Some long-time players in the industry have shared that they are experiencing a schizophrenic feeling ranging from fear of losses on existing deals, to a fear of losing new opportunities. Across the landscape, new realities and opportunities are starting to emerge in the aftermath specifically based upon property types and/or locations.
Clearly the hospitality sector has been the most severely impacted and is at the tip of the spear. After going through a 10-year recovery following the last financial crisis, the industry finds itself in unprecedented waters. Many hotels have closed, and most operators are applying for both federal and state governmental assistance. Some properties are focusing on serving the quarantined Covid-19 patients while others are assisting medical personnel and first responders on the front line of the medical battle.
Industry trade groups report occupancies are ranging from 2-30% for many properties that are keeping the doors open with skeleton staffs to avoid shuttering. Against this backdrop, other property professionals are assessing possible alternative uses for troubled hotels, such as senior housing and workforce housing.
According to long time hotel industry banking and consulting executive Tom Day, of TD Hotel Capital in Dallas, the hotel sector is among the hardest hit as measured by jobs lost, and the travel industry will be among the last to come back as the economy recovers. Hotel owners are fighting for survival with their attention focused on extreme cost containment, lender discussions, and governmental assistance.
Recovery will be slow. Leisure, corporate, and group demand will return in that order, but full recovery is dependent upon development of an effective vaccine for Covid-19. Despite these circumstances, hotel industry professionals are known for their optimism and creativity and will do all they can to accelerate recovery and create guest experiences that we are accustomed to enjoying.
On the other side of the spectrum, the already strong and robust industrial sector is expecting a substantial pickup in demand and new opportunities. According to David Welch, chief executive officer of Robinson-Weeks in Atlanta, the challenges with “just in time inventory” and supply chains and the acceleration of the blending of industrial and retail will create greater demands for industrial space.
Welch expects additional major tailwinds to come from online grocery shopping and the “onshoring” of American manufacturing back to the U.S. According to Welch, if companies keep an extra 5% of inventory, it could translate into 800,000 to 1 billion square feet of new demand for warehouse space. While the next few months will be challenging, the industrial sector should emerge with new and stronger tailwinds behind it.
The office sector is just starting to see the impact from the crisis and is benefitting from its traditionally long-term leases. This has created a fluid situation that is still unfolding. Concerns over tenant credit quality, workplace stations for users, workplace shift operations, and co-working tenants are surfacing.
How much future office demand will be impacted by companies allowing more remote locations for workers is a hot topic. In addition, discussions around the needs for lobby redesigns and new levels of workplace cleanliness are just beginning.
Dan Lovell, senior vice president with Graham and Company in Birmingham expects more creative and efficient ideas will emerge in the office sector. In addition, Lovell anticipates that as prices reset the investment opportunities will emerge for office investors.
The creative destruction in the retail sector due to e-commerce has dramatically accelerated due to Covid-19. One industry executive shared that he was in the credit analysis and credit counseling business with his smaller retailers. According to Darryl Bonner, senior advisor with Stirling Properties in Pensacola, Florida, the retail sector was performing strongly the first two months of the year due to consumer spending and confidence, but since then, the industry has felt the detriment the most.
The second half of the year should be healthier for retail due to a pent-up demand of consumers to dine out and visit stores. Certain retailers, such as grocery and home improvement stores, have flourished as consumers are staying home and working remotely. Smaller tenants, however, are challenged and are applying for government assistance. They are adapting quickly or closing. According to Bonner, if people can’t come to you to shop, they need to be able to access retailers from their homes.
The multi-family sector is seeing some initial turbulence with rent collections due to the uptick in unemployment, although it varies widely depending upon property level and location. The government-sponsored enterprises Fannie Mae and Freddie Mac quickly developed and published programs on lender forbearance terms for borrowers who did not evict existing tenants impacted by the virus.
According to Joseph Welden, president of StoneRiver Company in Birmingham, tenant collections are off modestly from prior months averages on Sunbelt garden apartment complexes, but they expect annual revenue to be relatively in line with prior projections.
Both leasing agents and tenants are adjusting to no physical showings and to virtual leasing, online tours, and facetime communications. Welden expects a continued increase in demand for SunBelt apartments from investors and tenants due to the continued single-family housing shortage and greater hesitancy by renters to become homeowners due to uncertainty in the market.
The senior housing sector, which has experienced strong tailwinds over the last decade, is seeing mixed implications to their properties and new developments. According to Justin Osborne, vice president at Flournoy Development in Columbus, Georgia, the silver lining for operators is a softening labor market that should reduce operation costs. On the contrary, increases in operations to combat infections spread may become a permanent fixture.
Developers of senior housing projects will wait to see how land prices and construction prices adjust to the new reality and strong, well capitalized developers should benefit. There may also be adaptive reuse opportunities from other property types to senior housing as distressed properties hit the market.
It’s clear from initial discussions that pivoting by developers and operators is occurring quickly. In addition, innovation and creativity are accelerating at a rapid pace. The long-term impacts are just beginning to unfold in this new season for commercial real estate.
Learn more about Auburn University’s Master of Real Estate Development program.
Auburn University’s Master of Real Estate Development program is a collaboration between the College of Architecture, Design, and Construction and the Harbert College of Business. It provides experienced professionals the theoretical and practical knowledge to develop real estate projects emphasizing best practices in economic resilience and design excellence. Visit mredauburn.com.
Greg Winchester is head of industry and alumni relations and adjunct professor for the Auburn University Master of Real Estate Development Program. He has over a 35-year career in banking, finance, and real estate. He is the founder and CEO of Summit Investors, LLC and previously was a co-owner and co-CEO of Trimont Real Estate Advisors.