Opportunity in Change – Making sense of commercial real estate investing in a post-COVID world

Ken Robertson
June 2020

I, like you, have been inundated with economic data…opinion pieces from prognosticators…predictions from economists and nonstop news feeds. Yes, the virus has shaken the world with everyone hitting the pause button. What should we believe from this headline news? How should we make investment decisions going forward? What paradigm shifts will permanently change the way businesses are operating?

To paraphrase Warren Buffet, “forecasts often tell us more about the forecaster than anything – nobody has a crystal ball.” Without doubt, we are wise to stay humble and accept our predictive limitations. Within the CRE sector, the predictions have been widespread…a few for our conversation today:

  • Commercial Real Estate will hold up relatively well amidst coronavirus fears, 2/28/2020, Yahoo Finance
  • Carl Icahn is shorting the commercial real estate market, which he said is going to ”blow up”, 3/13/2020, CNBC
  • Real Estate Billionaire Barrack Says, “Commercial Mortgages on Brink of Collapse”, 3/22/20, Bloomberg
  • Howard Marks Which Way Now (03/31/2020) and Nobody Knows II (05/28/2020), Oaktreecapital.com
  • Barry Sternlicht – “We’re buying now. We’re on offense.”, 4/22/20, Bisnow
  • The Pandemic will change American retail forever, 4/27/2020, The Atlantic
  • More big employers are talking about permanent work-from-home positions, 5/1/2020,
  • Warehouse Giant Seeing Insatiable Demand from Amazon, Walmart, 5/5/20, Bloomberg
  • Young are joining the rich fleeing America’s big cities for the suburbs, 5/21/2020, Bloomberg
  • Ethan Penner – “The COVID-19 economic fallout could create opportunities not seen since
    the early 90’s”, 5/26/20, GlobeSt.com

These headlines send mixed messages and lack actionable insights for investors. Smart CRE investing is about sticking to key principles, coupled with good external analysis of market conditions and growth drivers. To provide you with a better understanding of the changing marketplace, we wanted to highlight some insights for your consideration.

Insight #1: The best near-term property investment is likely to be in making a loan

With transaction sales coming to a standstill, property valuations are less predictable limiting optimal analytics on the equity side of the ledger. Debt with its senior security position provides a nice hedge to that cloudy valuation metric with a prioritization of rights, cash flows and investment returns.

Insight #2: Multi-family continues to serve as a bedrock real estate asset class

The multi-family housing sector has performed very well in achieving a higher percentage of both rental payments and increased renewal rates post-pandemic. This is especially true for modern, high-quality apartments (Class A & B) in high growth locations. The asset class has been a direct beneficiary of the Fed’s stimulus as it has translated into placing rent payments as a top priority. Lower cost-of-living locations are expected to experience continued strong net migration from cities as companies and people embrace remote working and less dense living.

Insight #3: Life sciences and healthcare properties benefit from continued demand

The explosive growth of the life sciences sector and its real property needs now coupled with the pandemic has transformed this burgeoning real estate asset class from one of excitement to one of existential importance. Further, demand for healthcare properties was already expanding with the aging of America and now is accelerating with the pandemic prompting further specialized properties, consideration for telemedicine and the broader asset class decentralization away from hospital campus environments.

Insight #4: Reshoring and increased demand for industrial

Bricks and mortar will continue to give way to eCommerce with an increased emphasis on supply chains including bulk and last mile distribution. Two-thirds of North American manufacturers say they’re likely to bring production and sourcing back to the continent which combined with less emphasis on just-in-time deliveries resulting in a significant increase in demand.

Insight #5: Consumers will prioritize healthier and safer places

Health, Wellness, Safety and Security (HWSS) has been championed for years in the built environment. Standards have steadily improved (think 9/11 and security), but often the hard data and consumer demand to justify major expenses, has been missing. This pandemic is providing that missing justification. Consumer awareness of HWSS practices will greatly impact demand (buying decisions) for all property types.

Insight #6: Retail’s reckoning

Retail’s previous decline or devolution has moved to its next level with the pandemic. Yes, piece by piece eCommerce is pulling more stores out of ground floor retail and messaging the death of the department store and hundreds of malls as more and more of us are relying upon Amazon, Costco and Home Depot to serve our needs. Retail capacity is being reduced, relocated and repurposed as an all-delivery economy that is no longer a notion, but a necessity.

Insight #7: Suburbs to become a favorite asset class

The decade-long trend of densification is over. Reduced commute times, avoidance of mass- transit and positive environmental impacts were already in process pre-pandemic. Post- pandemic has added and highlighted remote working which is set to deliver a big change with technology and cultural norms leading the way. The suburbs will cater to society’s social distancing prioritization with fewer constraints brought on in the urban core. We will see it everywhere, including housing, restaurants, and our leisure.

So, while we all scramble and brainstorm to return our nation to the pre-COVID state…I believe we have an opportunity for new ideas, new products, new processes, and new protocols to evolve in allowing us to optimize real estate’s usage and its role as an investment in our next chapter.

I hope these thoughts will help you better understand big trends on the horizon as you continue to evaluate your real estate investment activities.