Questions During Uncertain Times
Here’s a quick market update from our team and how it might affect future months in commercial real estate. Full disclosure, while we do invest in commercial real estate, we are speaking as real estate brokers and not investors. While we represent a number of property owners and buyers, who each have their own opinion on what the next three to twelve months will to look like in NH & ME, we are just highlighting what has happened, what is happening, and how these things could be different for the remainder of 2020.
How is Multi-Family going to be affected in 2020?
For people looking to sell their multi-family investment property (or any investment property), one of the major factors is adjustments in Net Operating Income (NOI). This is simply gross revenue minus expenses. With governors’ orders prohibiting eviction of tenants for non-payment during the shut down, this made many owners nervous. Dave Garvey and Ethan Ash completed a survey of over 1,000 units in the area and found that collection rates for April were over 90%. Tenants who had not paid almost all had plans to get caught up once unemployment or stimulus checks were delivered. In recessions, this is one of the most stable investment types as more renters exist in economic downturns. There has been very little change in demand in this product type and properties are coming available at amazing prices as long as NOI and cash flow remain in good shape.
The basics in housing still have not changed, even with the pandemic. New Hampshire is still facing a housing shortage across the state, and across all product types. Prior to the start of the pandemic, vacancy in the seacoast was less than 2% in the multi-family market, and less than that in the single-family market.
We have to ask ourselves; how will the low vacancy rate, and remaining high collections rate affect the start of new multi-family housing? How will the capital markets react across the country? Will they follow the same path as some reports of GSE’s requiring almost a years’ PITI in liquid assets in order to finance? As we begin to move out of the worst of the pandemic (we hope), answers should begin to become more available.
How is Industrial going to be affected in 2020?
Industrial appears to be poised to potentially have another robust year, because prior to the pandemic, vacancy in industrial space was nominal. At this time we have not heard of any space becoming available, or plans of manufacturers to close down. Most appear to be weathering the storm, even if on limited personnel and time. We hear of many banks working with the building owners, building owners working with the tenants, and everyone (for the most part) appearing to cooperate in the atmosphere.
One potential outcome of the pandemic is that more manufacturing might be brought back to the US from offshore. The pandemic appears to have exposed breaks in the supply chain, which both private and public sectors will likely start to address in the coming months and the next year as things begin to open back up. It was reported that Lonza would be manufacturing some of the drugs that would combat the virus. Again, we will have to wait and see.
How is Retail going to be affected in 2020?
According to the International Commercial Shopping Center (ICSC), $6.7 trillion dollars of consumer spending happens annually in the United States of America. With all retail and restaurants being closed (except for essential businesses) this is part of the commercial industry is taking a tremendous amount of the hit. While there have been some heroic stories of local members supporting community businesses, it is tough to determine how many businesses will survive this crisis with commercial tenants like Five Below, Dick’s Sporting Goods, and Burlington Stores all refusing to pay rent during this shutdown, according the Wall Street Journal. With decrease in demand for properties and increasing vacancy of retail space before COVID-19, it is likely to continue to shift for years to come. Very few investors are looking for this space now, which is where savvy investors are looking for the greatest return. Size, location, and terms will be key to each of these opportunities. Retail tenants, however, can likely lock in good rates for ideal locations this year or Q1 of 2021.
How is Land going to be affected in 2020?
Circling back to the basics, housing still has not changed, even with the pandemic. NH is still facing a housing shortage across the state and all product types. Prior to the start of the pandemic, the supply was limited. Throughout the pandemic, sales have still been brisk and pricing has not changed by much, even though supply has been constricted even further with some homeowners hesitant to have their houses opened up to strangers, even with all the precautions realtors take for safety.
Perhaps land will start to become another go-to investment vehicle during the upcoming year. Housing inventory is at its lowest point in years, and the industrial sector, which was doing extremely well prior to the pandemic, has not seen any fallout. The pandemic has exposed breaks in the supply chain, which both private and public sectors will likely start to address in the coming months and the next year as things begin to open back up. Bottom line, land will be a strong commodity.
How is Office going to be affected in 2020?
Right now many employers are asking themselves, “If all of my employees are working from home, why do I need an expensive office?” This is a longer term change in the market that we might see. Quickly we have seen a tremendous amount of people laid off. While service-based businesses that are not essential are seeing the large majority of applications, the office tenants are more likely the ones that are going to stay. So with less employees and the more limited work force working from home, demand may be adjusted in the upcoming years. Keep your eye on living migration changes as well. There may be a migration from highly populated areas to more rural areas until people feel safe from worldwide pandemics. 46% of commercial brokers think there will be a decrease in city populations. Office, along with retail, will be two of the most affected by the COVID-19 pandemic.
How is Special Purpose going to be affected in 2020?
So, what are special purpose properties? These include theatres, sports arenas, religious facilities, schools, hospitals, medical and dental offices, nursing homes, assisted living facilities, processing plants, refineries, mills, railway stations, and firehouses. Umm…everything we are not allowed to do is open during the shutdown. Because of the needs and demand for these types of uses and the costly nature of changing these properties, this sector will certainly have hurting cash flow. There might not be much of a change in supply or demand though.
The large questions that will be asked by society will be, “does more production need to happen statewide? How many hospital beds do we need to have? How will nursing homes and assisted living facilities be managed?” And, “what will happen to the hotel industry while travel remains restricted?”
How are Government Projects going to be affected in 2020?
At the end of the pandemic, where will the state’s financial position end up? Will the well managed states come out OK if the tax revenues from business are down as much as they might possibly be at this point? Will states & cities look at their payrolls and projects, and if they cannot get federal funding, will they have to set them aside? Will their payrolls have to shrink? Will they deficit spend or will they analyze their assets and determine which they can turn to cash? How long will it take them to see if they are in trouble? Will they be in trouble?
Some cities and some states have accelerated projects on highways because the traffic has been so light that they get more work done quicker. Will they work through all of their budget for road improvements and not have anything left if tax revenues start to slide down? Lots of questions, but hopefully our public servants are using their time wisely during this pandemic.
In these unprecedented times, it is tough to have answers for everything. When we break down real estate into supply, demand, and market forces, this allows us to think strategically on what might happen.
– Written by Dave Garvey & Ethan Ash
– Statistics taken from Wall Street Journal, and ISCS (International Commercial Shopping Center)