Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
Some property types may be well-positioned for success even in a pandemic…others not so much. Here’s how the current pandemic could play out for various segments of the U.S. commercial real estate industry:
Winner: Warehouse Owners
Industrial real estate was already in high demand before the pandemic struck. Now with millions of people having been told to avoid going to unnecessary gatherings and limiting their trips to the grocery store, the demand for e-commerce deliveries has become so overwhelming even giants Amazon and Walmart have been struggling to keep up. These companies are among those hiring tens of thousands of additional workers to fulfill e-commerce orders and the trend is not likely to go away even after COVID-19 has come under control.
Loser: Regional Malls
Regional malls have been in a downward spiral long before the arrival of COVID-19, but the pandemic will likely accelerate the demise of many retail tenants from several years to a few weeks or months. Before the pandemic, regional mall landlords tried to protect themselves from retail bankruptcies by signing on more restaurants, entertainment venues, fitness studios and beauty salons. Even if people can buy whatever discretionary goods they want online and are not excited by the prospect of visiting a Macy’s or a Gap, they would still show up to share a meal with a friend, see a movie or get a manicure or a haircut…the logic went. Except if there’s a pandemic and the last place they want to be is anywhere with less than six feet of distance between themselves and another human. With multiple retailers already facing bankruptcy filings, regional mall landlords are among those in the commercial real estate universe least likely to ever recoup their lost rents, and some may go down with their tenants.
Winner: Data Centers
Even when most of the planet was stuck at home…we were still using lots of data to work, shop, socialize, binge new shows and stream our workouts. Unlike malls and hotels, data centers got an “essential business” designation. In fact, some data center facilities are now operating at the peak of their capacity.
Loser: Seniors Housing
Some of the hardest hit companies, at least in the short term, are seniors housing operators…nursing home owners in particular. Nursing homes were already facing difficulty maintaining their occupancy levels prior to the arrival of COVID-19. Part of the challenge for nursing home operators is that their residents are people the most susceptible to the virus…those older than 80 and with pre-existing health conditions. But in some cases, lax focus on infection control measures played a role as well. As the pandemic continues, nursing home operators face increased costs to limit infections, while also seeing a deceleration in new resident move-ins. Since nursing home care is most often a need rather than a choice, however, the long-term outlook for seniors housing is much better than it is for malls.
Winner: Grocery-Anchored Shopping Centers
Following closely behind warehouse operators in seeing explosive growth in demand are supermarket chains and, by extension, owners of grocery-anchored shopping centers. Supermarkets and drugstores are among the last places where Americans continue to venture out to, especially as time slots for online grocery deliveries can be booked up weeks in advance for some providers, and common household items can be out of stock online. In addition, while restaurants continue to offer home delivery and pick-up services, they are suddenly less of a threat to supermarkets than they used to be. Some people can simply no longer afford restaurant meals. Others may be cautious about eating food prepared by someone else. If there were questions before about whether bricks-and-mortar grocery stores can be completely supplanted by e-commerce services, this pandemic has just proved that the answer is “No.”
Loser: Co-working Operators
Co-working providers were the “it” children of this past expansion cycle. With a booming gig economy and everyone touting “flexibility,” a whole slew of co-working providers came on the market in 2010’s, WeWork chief among them. Except it was never very clear exactly how well most of those players would withstand a severe economic downturn. We are now learning just how vulnerable they were. Even once U.S. businesses start getting back into the office, there will likely be less demand for office space overall and workers’ fondness for open spaces and sharing their desks with strangers has likely just gone down significantly. Some co-working operators will survive the pandemic. But there will be fewer players left in the space when all this is over.
Winner: Medical Office Buildings
If there is one thing pandemics prove is that demand for medical services exists in good times and in bad. Even if some medical tenants will be temporarily unable to pay their rents, real estate investors remain bullish on medical office buildings as a “safe bet” when there are currently few of those in the market.
Hotel operators were the first to feel the pain when people stopped traveling and industry groups cancelled conferences and conventions. Many operators, including Marriott International, Hilton and Hyatt, have had to furlough their staff. Depending on how long the pandemic lasts, hotel owners may find themselves facing the same dismal occupancy statistics and shortage of income for months. But if distressed real estate funds’ interest in hotel properties is any indication, the sector as a whole will eventually rebound. Once the virus is under control, conferences could be rescheduled and those Americans who can still afford it will likely be more than happy to visit places outside their immediate neighborhoods once again.
To be determined: Multifamily
On the one hand, multifamily owners are sure to feel a significant amount of pain in the coming months from missed rents as millions of Americans have been laid off or put on furlough as the result of pandemic-related shutdowns. On the other, people will continue to need housing, and reduced revenue is better than none.
In addition, with fewer people being able to afford homeownership…tenants that under different circumstances might have become homeowners will remain apartment renters.
That being said, the amount of pain in the multifamily sector will likely be unevenly split. Developers with projects that have just opened or were in the pre-leasing stages right before COVID-19 arrived will likely struggle to achieve full occupancy and pay down their loans. Long-time owners of older, stabilized buildings in major cities, where market rents have been trending sky-high in recent years, might get off with an unwelcome, but manageable, hit to their profits.
To be determined: Self-storage
Prior to the pandemic, the self-storage sector appeared relatively well-positioned. There was strong demand from end-users…though because of over-development, especially in primary markets, rent growth was stalling. As matters stand now, the pandemic will likely limit competition in the sector, as construction projects stall.
The question is whether millions of newly unemployed and furloughed Americans will use the government aid they receive to pay their self-storage dues when they are struggling to pay the rent on their apartments. One could argue that self-storage rents are “collateralized by the renters’ possessions” and tend to be very “sticky” during downturns.
But the world has not seen a downturn like this for at least a century and we expect that the industry is bound to see missed rents and renegotiated agreements. The government’s disaster-relief checks aren’t likely to be used by consumers for self-storage rent. Bigger priorities like food, transportation and utilities are likely to take precedence.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com