One month ago, the novel coronavirus was a distant concern—something to keep an eye on as it might impact liquidity in various parts of the economy. Now that we in the U.S. are starting to feel the full effects of the pandemic, are cracks beginning to form in the heretofore solid foundation beneath commercial real estate?
“We are in unprecedented times as we tackle Covid-19. Capital markets are not functioning as they do during normal times,” said Mag Mile Capital’s principal and CEO, Rushi Shah. “Our capital partners in the credit markets are grappling with the uncharted nature of these rapidly developing market movements.”
Shah pointed out that lenders are fielding a high volume of calls from existing borrowers, businesses and property owners seeking help or clarity. An added burden is that most employees at these lenders are working from home as part of social distancing, which in turn reduces productivity. However, not all capital sources are seeing the same level of sluggishness.
“On the flipside, debt funds with discretionary capital, private and public REITs, regional banks, local banks, credit unions, life insurance companies with strong balance sheets continue to be open for business,” said Shah. “With increased government guarantees, SBA lending will also be very active for qualified owners for the foreseeable future.”
In the near term, COVID-19 will disproportionately affect various real estate sectors. Retail and hospitality will be the hardest hit initially, while industrial is one asset class that could come through relatively unbruised, at least in the near term.
Recent commentary from DBRS Morningstar tackled the impact that COVID-19 will have on REITs and CRE companies throughout North America. When it comes to industrial, the commentary pointed out, it’s essential to keep the several types of industrial assets at top of mind, as well as the nuances that differentiate them.
The engine that drove the sector’s growth during this cycle was e-commerce and the associated logistics/warehousing needs that it engendered. Online shopping will likely only increase during the pandemic as foot traffic through brick-and-mortar stores plummets.
Manufacturing facilities could be more susceptible to societal reaction against the virus, though here, too, distinctions must be made. For example, is the manufacturing facility highly reliant on employees who may be furloughed to reduce person-to-person contact, or is there more automation present?
Even warehouse facilities could see some side effects, depending on the economic sectors that they serve. The petroleum and airline industries, for example, will face greater incremental stress, which will in turn be felt by the logistics warehouses supporting them.
Cold storage—a typical way station between food producers and consumers—should feel little affect from the pandemic. Similarly, data centers both have a small human component and provide an essential service to society that won’t dissipate due to COVID-19. Though there remain high levels of market volatility, we find ourselves in an extended period of low interest rates, a fact that some lenders and borrowers might be able to leverage. Even in these uncertain times, deals can come together for strong deals with air-tight fundamentals. We’ll have to see how the situation progresses before assessing long-term impacts.