Before the COVID-19 pandemic shifted the world into stay-at-home mode, the commercial real estate market in Detroit was in definite growth mode. Know? No one really knows.
But five top CRE professionals did their best to analye the impact that the virus has had on the Motor City and what the future here might hold during REjournals’ latest webinar, Detroit CRE and COVID-19: Strategies for a Shifting World.
The main message from yesterday’s webinar? It’s undeniable that all the main commercial sectors are struggling right now as Michigan and Detroit fight off the pandemic. But there’s also hope out there. And despite the obvious economic slowdown, business is still getting done.
If you’re interested in viewing the entire webinar, along with the other sessions that REjournals has held, click this link. And be sure to sign up our upcoming webinar on April 29, Demystifying Paycheck Protection Loans.
Marc Nassif, senior managing director with BBG, shared an especially knowledgeable view of the market. His company performs appraisals, so he is seeing firsthand just how COVID-19 is impacting the valuation of commercial real estate.
“It is daunting out there,” Nassif said.
The challenge? In a traditional market, appraisers look at an asset, survey current market participants and bundle that into an opinion on the asset’s value. That approach isn’t working today, Nassif said.
“The whole world has turned on its head in the last 45 days,” he said. “How relevant is data that happened six months ago, nine months ago?”
During the last 45 days, though, appraisers have had the opportunity to get on the phone more often and talk with people, Nassif said. He said that he has spoken to more clients in the last 45 days than he had in the six months before that. This means that the job of Nassif and other appraisal professionals has transitioned from looking at historical infromation to analyzing what is happening in real time. Appraisers are looking at how assets are performing now and how strong collections are today.
“The biggest problem we have is that we don’t have the sales data to show what is really happening out there yet,” Nassif said. “We expect that during the next 45 to 90 days, we’ll start seeing changes in sales prices. Now we are focusing on cash flows.”
Aaron Metaj, senior vice president with Northwind Financial, said that he, too, is on the phone all day now, talking with other lenders and banks to try to understand what is happening in the commercial market today.
And the consensus? Everyone is worried.
“It’s scary out there,” Metaj said.
Metaj said that companies and lenders have started to hoard cash as a way to get through the crisis. He said that lenders today fall into one of three categories: they are insolvent and have admitted it, they have halted lending to hoard cash or they have changed their lending guidelines to the point where they not doing much if any lending. That third category? Metaj says it’s a way for lenders to not lend without having to say they aren’t lending.
“For people to make money, people have to purchase,” Metaj said. “It will take some time before people get back out there and spend. It was like the country was going at 110 miles an hour and is now all at once going at 5 miles an hour. It is going to take some time to recover from this.”
Evan Lyons, senior director with Encore Real Estate Investment Services, said that retail, while definitely suffering today, isn’t the hardest-hit sector. He pointed to hospitality and entertainment as two commercial sectors that are suffering more.
Lyons said that from the transactional side, investor demand for certain retail assets is continuing to grow.
“It comes down to a flight to quality,” Lyons said.
Lyons pointed to grocery stores, home-improvement retailers, pet supply stores and dollar stores as retail classes that are still open for business and doing well today. Pharmacies are doing well, too, he said.
“These assets are open and thriving,” Lyons said. “They have shown themselves to be a vital part of the economy and the community during good times, during recessionary times and during this health crisis.”
Steve Chaben, senior vice president with Marcus & Millichap, agreed with Lyons that there is a flight to quality among investors today. He also said that deals are still being closed, though it’s not always easy today.
He pointed to Marcus & Millichap last week closing on a $50 million apartment building in Columbus. Chaben said that delas that were in escrow and close to being closed have closed. That was the case with the Columbus apartment building.
Most of the lending being done today, Chaben said, is from regional and local banks and credit unions.
“The sponsorhip is very important,” Chaben said. “Qualified buyers who see opportunity today are gearing up.”
Chaben said that he and his fellow professionals at Marcus & Millichap are spending their days reaching out to clients, helping to guide them through these challenging times.
“Our clients started the year with a business plan that has definitely been impacted now,” Chaben said. “We are trying to understand how they have been impacted and what they are doing in terms of a course correction. There is a lot of dust in the air. There isn’t much that is real clear right now. But this is a great time for us to further our relationships with our clients.”
Alfredo Gutierrez, president and founder of SparrowHawk Real Estate Strategists, said that he expects both the multifamily and indusrial sectors to come out of this pandemic in the best condition of all the commercial classes.
Gutierrez is especially impressed with industrial’s ability to survive this pandemic. And when life does return to a semblance of normality? He expects to see an even greater focus on the industrial market.
“Industrial is positioned to come out very strong,” Gutierrez said. “That doesn’t mean we won’t weather some bumps in the road, but this sector is poised to come out healthy once this ends.”
Gutierrez did say that larger industrial tenants, those with 50,000 to 70,000 square feet, tend to be weathering the storm better than are smaller tenants.
“They might be operating under a reduced workforce, but they are still operating,” he said. “I do think they are still doing well.”