The common understanding, from dozens of articles, conference calls and webcasts lately, is that commercial real estate will not emerge from the COVID-19 crisis unscathed. Indeed, the consensus that many analysts, myself included, have advanced is that the property business, particularly amongst asset classes like retail and hospitality, will suffer deep impacts as the virus cripples demand even as debts continue to pile up.
But does it have to be that way? While this remains the $16 trillion question, it’s already possible to suggest how the market may respond to a continued outbreak. In our newest research report, where we surveyed the sentiment of our readers on a wide range of coronavirus factors, most of our respondents came up with what seems like a pretty optimistic assessment: that sales and leasing will both return to their pre-outbreak activity levels in 90 days to a year. We collected these responses at the beginning of April so already that number would be decreasing.
There is no doubt that this could be wishful thinking. Brokers, interested in keeping transaction volume up, have an interest in steering the economic ship in an even-keel direction. However, others have shared similar perspectives, such as another survey focusing on commercial real estate professionals in Wisconsin. It may not just be brokers after all.
Making matters more interesting is the consensus amongst our respondents that property values would drop by 11 to 20 percent due to the outbreak. One might think that property owners, expecting value drops, would refrain from sales activity. But given the short expectation for transaction volume drops, we can understand that plenty of people will be transacting sooner than later.
So who would this be? Property owners who have reached such disastrous times that they are forced to sell their properties are the most likely candidates. For properties that stay performing well, few owners will want to sell in the face of depressed pricing.
Instead of sellers driving the “stabilization wave” of transactions that our respondents expect, perhaps it will be distressed owners that have no recourse other than to sell at a potential loss, contributing to a market driven by buyer activity. Indeed, across asset classes plenty of owners are positioning themselves to go on shopping sprees. Blackstone has $152 million of dry powder, with president Jonathan Gray saying on an earnings call, “We have so much capital—that’s a great competitive advantage. We don’t need financing to get things done.”
Blackstone is not alone. There has been an explosion of activity amongst funds targeting distressed property debt lately, to the tune of 939 raising money as of early April. It isn’t just about debt, either. While companies like Blackstone and KKR may be interested in going that route, for smaller investors, there will be ample opportunity to directly reposition struggling assets. That big box store sitting shuttered for the last couple months? That could be a last-mile fulfillment center. That struggling Class B or C student housing property located just off campus? It could be repositioned upwards with an eye towards wealthier students with more secure guarantors. The motel by the freeway that has been struggling to make its debt payments? It’d make for high-quality workforce housing.
Reconciling our two seemingly contradictory data points of a short impact to transaction volume, despite notable pricing pressure points, to the fact that buying is about to go through the roof, whether distressed owners are happy about it or not. Sometimes the best way to get through a rough day at work is to lean into it and focus on tomorrow. The investors big and small getting ready to fire off a salvo of investment capital are taking much the same approach.