What a World – What a World
(What Will Happen to Real Estate Values Second Half of 2020)
How can you get good information on such an unprecedented event? It’s hard to know what to do or what not to do. Who is affected and who is not affected? I’ve heard wear gloves and don’t wear gloves. Masks are the only way to limit the exposure, but will they really work to stop the spreading? Stay six feet apart; what about 5’ or 7’? And beware of loud talkers. Are people with different blood types affected differently? So much information that I don’t know what to think. But what about the real estate market, will the market remain flat or are we in for large price adjustments?
The 1980’s song by The Clash “Should I Stay or Should I Go” comes to mind on investing in real estate today. Many investors are withdrawing and taking a wait-and-see attitude or damage control on tenant fall out. I am looking at the market overall from a “here’s what I know” standpoint. For example, my company manages 3.5 million square feet of mostly retail and industrial space. Mostly multi-tenant smaller lease spaces. What we found in April and May is less than 2% of the industrial tenants requested help on rent and on the retail less than 10% requested help. On the flip side I have heard on retail up to 30% percent on average requested some form of abatement or deferment. Most of our landlords worked out arrangements for deferment of up to 3 months of rent if necessary and arrangements for tenants to make up for these payments through the end of the year and requested tenants to work on getting government loans and assistance grants.
On the lender side, I have heard some bank officers offering up to 3 months of deferment on all payments including escrows and adding the payments to end of the loan period. And I have heard other lenders are not being as lenient.
Does it all boil down to employment? Latest numbers from Bureau of Labor Statistics (BLS) on June 5th we are bouncing back, but we have a far way to bounce. Estimates are unemployment peaked at around 15% of the working population (the largest since the Great Depression). The BLS reflects that we gained 2.1 million jobs in May. I can only look around and see all the business that is not taking place like sporting events, concerts, limited activity at restaurants and bars and I have to think the impact is huge. Yet, I have heard large ticket luxury items like boat sales are having a record month in May.
After living through the 1986 commercial real estate crash, Y2K and 2007 crash I recognize that real estate was impacted in all of these to different degrees. Will we have a V shape recovery or will it look different? I am not sure we will ever get back to the normal that we were used to with many of us finding out we can be productive from home and don’t need that big office.
I would like to be a glass is half full person but I need to be a realist and I think we will bounce back as America always does but based on what I am seeing it is going to be an up and down economy through the balance of the year and opportunities in real estate are on the horizon. I anticipate most opportunities in the hospitality, restaurant, retail and office area. Over the next 12 months if people continue to stay home and lender deferments and government support go away, some of the highly leveraged investors will feel the pinch. That being said there is still a lot of cash on the sidelines waiting for opportunities and values overall will have minimal adjustments. After a couple years this will be just a memory and commercial real estate will continue to be one of the best investment options available.
James Blake, CCIM