It’s now been more than four months since the COVID-19 pandemic forced governors across the country to issue shelter-in-place orders and shut down restaurants, businesses, bars and theaters. Since then, several states have reopened their economies and others are shutting them back down in response to increases in COVID-19 cases.
It can be hard to find hope amid the mass of headlines focusing on COVID outbursts, debate over how or if to reopen schools in the fall and threats from governors to force bars and restaurants to shut down again.
But hope is out there in the commercial real estate industry. While it’s true that many sectors, including hospitality, entertainment and retail, have been decimated by the pandemic and business shutdowns, it’s also true that other sectors remain strong. Some have even seen an increase in demand.
There’s also hope on the vaccine front. A coronavirus vaccine made by biotech firm Moderna is the first tested in humans and has shown promise in early tests. In early trials, it has provoked what experts are calling a promising immune response against the virus.
Moderna has since said that tests involving 30,000 people would start on July 27. The hope is that those results will be positive and show that those who were vaccinated are less likely to contract the coronavirus than those given a placebo.
There are reasons to be hopeful, then. And two commercial real estate professionals interviewed for this story say they have found plenty of reasons to be optimistic even today when gloomy headlines dominate.
Why? They are working in CRE markets that are holding steady and are poised for big rebounds.
Industrial still a stalwart
Judd Welliver, executive vice president in the Minneapolis office of CBRE, said that the industrial market in the Minneapolis/St. Paul area is an example, with activity in this sector remaining strong throughout the pandemic.
The reason? An increase in online shopping has only spurred demand for more warehouses across the country. Many consumers are still worried about shopping in brick-and-mortar stores, so they’re ordering more products online.
This has been a boon in the Twin Cities region even before the COVID-19 pandemic hit.
“One of the key drivers for Minneapolis is that we are still in the early innings from a distribution standpoint,” Welliver said. “We are still undersupplied relative to the demand.”
The Minneapolis area also boasts a diverse set of businesses, with no single industry making up more than 20 percent of the market. This helps the area weather a slowdown in any one particular industry; there are plenty of other industries in the region that can help boost those that are sagging.
At the same time, developers in the Minneapolis/St. Paul area have remained cautious when planning new industrial projects. This means there hasn’t been an oversupply of commercial space in the area.
“We never overbuilt,” Welliver said. “Our demand has outpaced our supply during the last eight years coming out of the Great Recession. When COVID hit, our industrial market stayed strong. Investors have recognized its strength. They have looked at Minnesota as a very strong, stable market to invest in.
An example of the busy market? The CBRE Minneapolis Institutional Properties team — which includes Welliver, Ryan Watts, Sonja Dusil, Bentley Smith and Tom Holtz — has closed three industrial sale transactions during the past 30 days, transactions that totaled more than 500,000 square feet and more than $48 million in volume.
This begs the question: When the COVID-19 pandemic first swept through the country and states began shutting down businesses and ordering non-essential workers home, was Welliver worried that the Minneapolis-area industrial market would take a bigger hit?
“I was not worried about the strength of the market,” Welliver said. “My bigger concern was whether pricing would hold up and would the debt markets support commercial real estate. For the first 30 days of this, the debt markets kind of froze up. There wasn’t a lot of clarity out there. There were concerns about deals. Where they going to proceed and get done? But since then, the debt markets have loosened up and have had a preference toward industrial. And pricing has held strong with it. Liquidity and pricing have both held up.”
Like other commercial real estate professionals, Welliver has adjusted to the temporary new normal brought about by the pandemic. He has been working at home since the middle of March. He’s now learned how to be productive from his home office.
“For the first 30 days I was pulling my hair out and going nuts,” Welliver said. “But I’ve adjusted, like everyone else. Today, I am very busy. And I’m busy working on execution, versus during the first 30 days. Back then, I was busy putting out fires and talking through how we would deal with the challenges. Now I am working on execution and advising clients. I’ve adjusted to the climate of working from home, and I’ve certainly enjoyed spending more time with my family.”
Reasons for optimism in multifamily
George Tikijian, executive managing director in the Indianapolis office of Cushman & Wakefield, has found plenty of reason for optimism, too, in the commercial sector in which he specializes, multifamily.
This isn’t surprising. Along with industrial, multifamily real estate has been holding its own even during the most challenging days of the pandemic.
Tikijian said that a large majority of renters continue to pay their rents on time. At the same time, fewer people are moving from their current apartments. This has boosted retention rates at Indianapolis-area apartment buildings, Tikijian said.
“Not only are people sheltering in place, they’re not moving as much,” Tikijian said. “This has been especially evident during the spring and summer, which are traditionally busy times for apartment moves. April through July are the peak months for moving. We have seen a lot fewer people doing this.”
The majority of apartment buildings throughout the Indianapolis area, then, remain highly occupied, Tikijian said. Most apartment owners haven’t had to turn to concessions to keep their residents.
The sales side of the Indianapolis apartment market has evolved since the COVID-19 pandemic first hit, Tikijian said. From the middle of March to the middle of April, multifamily sales came to a near shutdown, he said.
“People didn’t know what to do,” Tikijian said. “People didn’t know what was going to happen. The capital markets were all over the board. The stock market was dropping. Fannie and Freddie changed their underwriting to become more conservative. All of these factors shut down sales for a while.”
Then things started to change. First, the federal government flooded the market with money, providing enhanced unemployment benefits and sending out stimulus checks. That helped stabilize the stock market, capital markets and bond market, Tikijian said. Fannie Mae and Freddie Mac stabilized their underwriting guidelines.
And, just as importantly, rent collections remained strong throughout April and May. That had a major impact in the confidence of multifamily owners and investors. This new confidence has resulted in sales once again opening up in the multifamily market.
“When it became clear that most properties were doing far better than expected that also stabilized the market,” Tikijian said. “People were no longer sitting on their hands and waiting to see how bad it was going to be. From the middle of May through now, buyers have come back and each week we are seeing more people who are actively looking to buy. There isn’t that much for sale in the market, but what is for sale is getting good activity.”
Tikijian said that he is grateful to work in a market like Indianapolis. Before the pandemic hit, the Indianapolis commercial market was strong. It didn’t experience the big ups or severe lows of other markets. Stable and steady is the best way to describe the commercial real estate market here.
This stable nature continues to attract investors, even today, Tikijian said.
“We have always had a stream of East Coast buyers here, but that has picked up in the last three months,” Tikijian said. “We saw very minimal price declines in our market. There were larger price declines in markets where the prices were so much higher before the pandemic. In Indianapolis and other parts of the Midwest, the price dislocation was fairly minimal.”