While the impacts of the coronavirus have been devastating, from a property perspective it has been a bit of a mixed bag. The hit taken by retail properties has been deep, with plenty of missed rent and bankruptcies over a variety of different store types. But other expected problems, like tough times with multifamily rent collection, have failed to materialize. The drop in May rent collections through the 20th of the month was less than 3% from the year before, at a still-lofty 90.8%.
What does this mean for property investment? Will the big troughs expected when the outbreak was first hitting the United States miss us or are they still coming? The answer to that comes down to two distinct questions. First, what property types represent good investment opportunities now. That one has been discussed ad nauseam. But the second question is a bit more interesting: When should investors go ahead and pull the trigger?
An unsurprising thing has happened as states around the country begin to relax their lockdown guidelines: Pent-up demand has people beginning to venture out to restaurants, bars, offices and stores. Even as we passed the tragic milestone of 100,000 deaths, numerous people have still started resuming their lives, in one way or another. These traffic maps, comparing activity on April 11 to May 24, are very illustrative in showing us the percentage of activity levels throughout the U.S. based on pre-COVID standards.
From a public health perspective this is a challenge. We don’t have a vaccine yet, and our treatment options are still limited, and herd immunity is not only far off, but also correlates to more suffering. Judging from the number of people out and about at parks in my city alone over the last week or two, it seems that a lot of people have taken the economic reopening as a signal that it’s time things return to normal. Despite the recent slowdown in deaths, the ramp-up in public activity will very likely lead to another wave of infections and deaths just around the corner. Remember that the coronavirus has a long incubation period. People with the disease could be spreading it to others for an entire week before beginning to show symptoms themselves.
As we discussed in our newest report, there has been a lot of talk about the $300 billion of dry powder sitting in reserve with investors across the country. For big investors with a cut of that funding and well-capitalized smaller ones alike, it’s a sad yet pragmatic reality that great buying opportunities will likely come in communities and property types hit hardest by the outbreak. Sick people, or people slammed with particularly restrictive lockdown guidelines, aren’t going to be turning the gears of the local economy to the extent that healthy, less-constrained people will be.
When you take that investment scenario and add a country full of people itching to get back out into a world that is still very dangerous, there’s one conclusion that stands out: Investors should wait, since the market is probably going to get worse before it gets better. Rent collections may not have been hit too hard thus far, but give the outbreak a couple more months against the backdrop of a political system that can only offer fragmented aid, and slowly at that, and the long-term prognosis could be a lot grimmer than we’ve imagined. For those property owners who aren’t stuck with a 1031, the smart money might be on holding off for just a little longer and seeing how much worse things get.
Of course, buying properties in cities that have suffered deeply from the outbreak and then hoping they will magically turn around is a great recipe for failure. But here’s the opportunity for real estate to give back a bit in a very tough time. By taking the remnants of retail, apartments, and hotels that wind up unable to hold out through a pandemic (that very likely ends up lasting through the end of the year) and transforming them into new, market-appropriate uses, property investors could do a world of good for communities in transition.
Unfortunately for mom ‘n’ pop retail in low-density areas, COVID-19 could be the inescapable blow that prevents them from recovering. If these retailers fail, those buildings could wind up serving greater, more beneficial purposes than simply sitting vacant and waiting for the next small retailer to just try again. Maybe these buildings turn into small community spaces, funded through innovative partnerships between landlords and tenants. Maybe there is just another type of retail that works better for the area, or perhaps a better use would be distribution space. And for those hotels, maybe workforce housing conversion is the new highest and best use.
This is the opportunity that real estate investors have to capitalize on. When it works how it should, development rewards everyone, local stakeholders and investors alike. It’s a tragedy that the best advice for investors might be “wait for things to get worse,” but if it’s acquisition pricing that is holding up the most inventive use cases, perhaps there is a silver lining after all.