The COVID-19 pandemic has thrown the world of commercial real estate into disarray. Industrial is thriving and multifamily is holding steady. But the other sectors are facing challenges, with retail, hospitality and entertainment especially struggling.
The question, then, is a big one: When will the commercial real estate industry return to at least something approaching normal?
Berkadia’s 2020 Mid-Year Powerhouse Poll gives some indication of when CRE pros expect the market to regain its footing. Poll respondents said that while the CRE industry is surviving the pandemic better than they first expected, transaction activity probably won’t return to at least a version of normal until sometime in 2021.
The poll, conducted in early July, collected insights from nearly 150 Berkadia investment sales brokers and mortgage bankers across 60 offices to assess the impact COVID-19 has had and will continue to have.
Despite early concerns, 55 percent of Berkadia professionals said that current market activity is better than expected compared to how they initially thought COVID-19 would impact the industry. Thirty-four percent say the current market is in line with their expectations.
“COVID-19 continues to have a profound impact on our economy, and while no industry is immune, we have been buoyed by the resiliency of commercial real estate, including steady rent collections and continued deal activity,” said Ernie Katai, executive vice president and head of production at Berkadia.
In a bit of good news, 69 percent of Powerhouse Poll respondents said they felt confident that capital conditions will return to normal in 2021. Berkadia professionals’ sense of the timeline of recovery aligns with that of investors, too. The firm’s Apartment Investor Sentiment Survey shows increased confidence in the multifamily market over time. When initially surveyed in April, 47 percent of investors agreed that recovery from current capital conditions by 2021 was likely. The same survey conducted in June saw that number rise to 55 percent.
An increased focus on affordable housing
When asked to rank housing types based on their ability to maintain success through a prolonged economic slowdown, Berkadia experts noted Class-B (85 percent), true affordable (81 percent) and Class-A (69 percent) housing as most likely to sustain.
The current economic slowdown is causing housing experts to focus on the lack of affordable housing in the country. Because of this, investor interest in multifamily properties for low-income residents continues to rise. Eighty-one percent of Berkadia professionals agree that investors will be more interested in affordable housing properties than before as a result of COVID-19’s economic impact.
“Housing instability has been exacerbated by the economic downturn and increased unemployment, but a renewed focus on affordable housing could be a silver lining of this challenging time. This pandemic has demonstrated how vital safe, reliable housing is for the stability and well-being of our communities,” said Katai. “While the affordable housing market has been impacted by COVID-19, it has performed better than other asset classes and is comparatively well positioned for recovery.”
When asked to identify three potential solutions for improving the affordable housing crisis, modifying tax credit policy (76 percent), local and state government intervention (61 percent) and regulatory changes for GSEs (43 percent) were cited most frequently by Berkadia respondents.
Adapting to the new market
When asked how investors’ actions changed since the onset of COVID-19, Powerhouse Poll respondents cited seeking immediate financing on currently owned properties (64 percent); focusing on business operations rather than deals (55 percent); pausing all activity in their portfolio (46 percent); and seeking advice and recommendations on how to react to the market (45 percent) as the most common trends.
Despite commercial real estate being a predominantly in-person business, quick adaptation of technologies and remote working practices have kept operations and communication in motion. Ninety-two percent of respondents agree that the adaptations and improvements made as a result of COVID-19 and social distancing requirements will persist and the commercial real estate industry will continue to advise clients remotely in certain situations in the future.
As we continue to see technology transform all aspects of commercial real estate—during this time and beyond—respondents cited streamlining and enhancing deal processes (60 percent), enhancing investment decisions (56 percent) and increased flexibility around deal closings through innovations like virtual property tours (52 percent) as ways technology will have the greatest impact on the industry during the next five years.
Taking the long view
It’s grabbing all the headlines today, but COVID-19 is not the only thing about which CRE professionals are concerned.
“While it’s easy to get caught up in the near-term impacts of the pandemic, we cannot lose sight of the significant events on the horizon—the election, the LIBOR to SOFR transition, potential GSE reform—that will inform the direction of our industry in the coming months and years,” said Katai. “It is incredibly important to take the long-view when it comes to the commercial real estate industry. The industry has weathered periods of significant transition before, and we are confident in our ability to work through this one just as we have done in the past and will face again in the future.”
From mortgage banker respondents, interest rates (86 percent), the 2020 election (49 percent) and debt underwriting and willingness to underwrite new income (25 percent) were cited as some of the top trends on their radar looking ahead. The election (59 percent), debt underwriting and willingness to underwrite new income (50 percent) and institutional investors (30 percent) similarly ranked at the top for investment sales advisor respondents.