COVID-19’s Impact On The Commercial Real Estate Market
As the Coronavirus (COVID-19) has officially crossed over from epidemic to pandemic territory, it feels like pandemonium has come along with it.
All eyes are now on the financial markets, and rightly so. With the stock market rates plunging, it’s important to remember that commercial property is not the stock market. Its slower moving, less correlated and leasing fundamentals don’t swing as wildly from day to day.
As has been astutely noted in the past: The market can handle good news. The market can handle bad news. However, the market can’t handle uncertainty.
Three weeks ago, the market was at an all-time high, unemployment was at an all-time low, Bernie Sanders was dominating the Democratic primaries and the financial industry was sailing along beautifully. This was three weeks ago.
Image Credit: USA Today
As the Coronavirus (COVID-19) has officially crossed over from epidemic to pandemic territory – having spread to 100+ countries and resulting in 6000+ deaths – it feels like pandemonium has come along with it. All eyes are now on the financial markets, and rightly so. Stocks have been in a free fall (at the time of this writing, the Dow was down 10% today – its worst single-day of trading since 1987), travel has been banned from Europe, districts in states across the country are closing schools, professional and collegiate sports have suspended their seasons, even Disneyland has shuttered for the foreseeable future.
This article intends to take a quick dive into the impact of Coronavirus on the markets, and more specifically, commercial real estate in the United States.
Despite dramatic Fed intervention – pumping $1.5 trillion into the bond market and announcing it will buy $60 billion worth of Treasuries over the next month – the stock market barreled further into a bear market – which signifies a 20-percent decline from an all-time high. Though the Federal Reserve regional governors will likely decrease their GDP forecast for 2020, they have already dramatically reduced interest rates down to .25% through two emergency cuts.
Finding Security in Commercial Properties
Even though the plunge in rates has led to greater uncertainty in commercial real estate amongst lenders, borrowers and investors, it’s important to remember that commercial property is not the stock market. Its slower moving, less correlated and leasing fundamentals don’t swing as wildly from day to day. Though COVID-19 will hit some aspects of the sector harder than others – namely hotels in the form of decreased demand and hospitality spend – other segments of commercial real estate, like office space, are more insulated and coming into this period from a position of strength.
“If you truly have a diversified portfolio, some of your holdings should be doing better with this recent market downturn. If everything in your portfolio goes up and down in lockstep, you probably aren’t as diversified as you think.”
– Ryan Marshall – CFP
The view of Excelsior Capital is that multi-tenant office space is a relatively safe harbor in the uncertainty of global and domestic markets. We continuously stress the importance of diversification, and investing in real estate is one of the best ways to do so. Our institutional ownership combined with the longer-term duration of our leases provides some stability against continued direct fallout. To put it simply, even if the CDC were to tell everyone not to go to the office and work from home until further notice, occupiers still have leases and rent still has to be paid.
Predicting The Near and Long Term Effects of COVID-19
While the capital markets are more forward thinking and their effects more immediate, leasing fundamentals typically lag the economy, making the long term outlook of commercial real estate hard to predict. We do not yet know how widely COVID-19 will spread, but if it does become contained, we are hopeful the downside impact will be acute with the potential for a surge in activity during the second half of 2020 due to pent-up demand. What we anticipate is a flight to quality as investors seek less correlation to the broader markets and yield-producing assets to hedge against volatility.
At Excelsior, we believe we are well-positioned to capture this as we’ve created a portfolio centered around income generation to withstand the kind of heightened volatility and concerns about near-term economic weakness we are seeing today. Our portfolio has thus far been resilient, revolving around a core-plus investment strategy, which can be viewed as a grounded play for our more defensive investors. Our investment team is actively engaged with our operating partners and we are closely monitoring property performance. Given that multi-tenant office assets represent 100% of Excelsior’s investments, our operating partners’ primary role is to ensure that we take all appropriate actions to safeguard the health and well-being of occupants. We have been very purposeful in investing in office properties with strong in-place income from creditworthy tenants.
While we can’t control the public response to COVID-19, we can control our individual response. Be smart with your money and be smart with your actions. Wash your hands, be conscious of others and stay healthy. This is something we are experiencing together, and we will get through this together.
Louis O Connor is the Founder of Strategic Metals Invest, which is currently the only business in the world offering Rare Earths as physical assets to private investors.
Teddy Himler is a Venture Capital Partner, running a fund at Antler that focuses on what he calls emerging tech ecosystems.
Dwayne J. Clark is the Founder and CEO of Aegis Living. With more than 37 years of senior housing experience, Dwayne is nationally known for redefining the industry.
Diana Chambers is a highly respected Family Wealth Mentor and Philanthropic Advisor who established her business in the US in 2002 and subsequently in Switzerland, where she now resides.
A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.
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