COVID-19 pandemic wreaks havoc on traditional commercial real estate metrics

National, local experts opine ‘new normal’ in time of novel coronavirus

Posted 4/21/20

A commercial real estate brokers forecast provides illustration to what many Arizona business leaders are realizing: a deep recession appears imminent.The forecast was created by The Center for Real …

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COVID-19 pandemic wreaks havoc on traditional commercial real estate metrics

National, local experts opine ‘new normal’ in time of novel coronavirus

Posted

A commercial real estate brokers forecast provides illustration to what many Arizona business leaders are realizing: a deep recession appears imminent.

The forecast was created by The Center for Real Estate Theory and Practice at the W.P. Carey School of Business at Arizona State University.

“I was taught in graduate school when learning how to do population projections, one of my professors told me: ‘Those who know how to predict the future, know better,’” said Mark Stapp, executive director at The Center for Real Estate Theory and Practice.

“I always have to preface these conversations when we are talking about forecasts. They can help us better understand what the future might be. The one we are discussing is trying to look six months forward in time.”

The Center for Real Estate Theory and Practice conducted a “forward-looking survey” focused on the time period from April 2020 to September 2020 receiving responses from over 200 commercial real estate brokers throughout the Phoenix metropolitan area.

“This particular instance, we saw a dramatic change very quickly,” he said.

“As an aside, when this went out it was at the very beginning of the shutdown process, Arizona did not have a stay-at-home order yet. The results don’t necessarily reflect peoples’ opinions when they are more fully informed of what is going on. Forecasts like this, are about trying to establish overall opinions of what the future might look like. Again, making any kind of categorical statement is tough. We are talking about different segments of markets, different product types and different segments of those markets. This is no revelation, however.”

One data point known for sure gleaned from the forecast: 81% of the more than 200 respondents believe a recession is brewing.

“Everyone is aware of the fact that we don’t know how long this is going to last,” Mr. Stapp said of the coronavirus crisis.

“We may be able to go back to normal in the next 30 days, the next 45 days --- maybe the middle of June. Unfortunately, for Arizona, a lot of nonessential businesses are sometimes greatly dependent on the seasonality of our demand. So, we are talking restaurants, food and beverage establishments, they rely on our burgeoning fall, winter, and spring marketplace. We anticipate they will come back when demand is the lowest.”

Mr. Stapp says traditional thinking would suggest commercial property owners are likely to experience significant drops in gross revenue.

“Those are huge impacts on your revenue --- other things that will impact is how lenders decide to deal with the situation. If lenders will provide the necessary forbearance is a big question,” he said. “Everyone is going to equally feel the pain. You want those tenants to survive because you have nobody to replace them with.”

But Mr. Stapp points out despite the global pandemic established taxing measures will continue on commercial real estate parcels.

“It doesn’t stop property taxes, insurance and it doesn’t stop maintenance costs and security,” he said. “It certainly doesn’t stop loan payments. Some of this recovery is going to be dependent on the willingness of lenders to provide forbearance that matches the impact on the tenants.”

The reality of a new normal

On Tuesday, April 21 Los Angeles-based CBRE: United States Commercial Real Estate Services issued its own economic outlook impacting several sectors of commercial real estate on a national level.

Spencer Levy, CBRE chairman of Americas research, senior economic advisor, provides a cautiously optimistic view of Americans returning to work in coming weeks.

“Much of America is planning its return to the workplace,” Mr. Levy said.

“While that is a welcome turn of events, we also need to acknowledge and embrace that companies will return --- slowly --- to a changed workplace with new procedures. Office users likely will practice social distancing by rotating employee groups allowed into the office on certain days. Restaurants, stores and hotels will need time to reassemble their workforces and restock supplies while limiting in-person patronage.”

--- Spencer Levy

The CBRE report outlines the U.S. unemployment forecast has risen to 10.5% from 3.5% meanwhile Arizona is seeing record numbers of jobless claims.

Figures published in early April from the Arizona Department of Economic Security show there were 129,215 initial claims for the week ending Friday, April 3. In all, Arizona is seeing record jobless claims week after week, data shows.

“It is likely that society and business won’t fully return to normal until we have a vaccine,” Mr. Levy said. “Meanwhile, as commercial real estate copes with ramifications of COVID-19, collections of April rent surprised on the upside for office, industrial and multifamily at around 90%. However, April collections were below expectations for retail at between 20 to 40% on average depending on asset type.”

CBRE officials predict reopening of retail stores will take multiple safeguards still undefined meanwhile the hotel and event portion of commercial real estate won’t see restrictions lifted until sometime in 2021.

“The industry is watching May collections even more closely as an indicator of the health of commercial real estate in the short term,” Mr. Levy said. “Despite the tremendous economic challenges in front of us, pent-up demand from consumers and office users will provide a spark for spending and office use shortly after movement restrictions are loosened.”

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