Category: Commercial

Seven CRE Economists Offer Their Advice and Predictions for the Sector

While there are still a lot of unknowns about how the pandemic will play out, we talked to seven commercial real estate economists about their views on the future of the industry.
As we move into the summer months, there are still a lot of unknowns around how the COVID-19 pandemic will play out, including how much worse the first wave of infections is going to get, whether there will be a second wave in the fall and how soon we might expect some type of vaccine or effective treatment. But with the full understanding that predictions about the future are not an exact science, especially in times of crisis, we asked seven commercial real estate executives with backgrounds in research and economics to offer their outlooks on what the current situation might mean for real estate investors.

In the following slides, they share their predictions and advice for commercial real estate insiders.

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10 CRE Deals That Had Fallen Through Due to the Pandemic

The disruption from the pandemic and the subsequent liquidity pullback have spelled the end for a number of planned acquisitions.

Two months into the lockdown, the pandemic has disrupted a number of high-profile real estate deals, including stand-alone building sales, portfolio transactions and entity-level equity infusions. Some had fallen apart because the buyer couldn’t secure financing in a market that had become less liquid. In others, the acquisition just no longer made sense, given the economic outlook. A number of these disrupted deals have even led to legal disputes, with the seller insisting the buyer uphold its end of the contract.

In March, the most recent month for which data is available, 1.1 percent of real estate investment sales under contract had fallen through, according to New York City-based research firm Real Capital Analytics (RCA). From 2016 through 2019, the average for such transactions was 0.4 percent. But the fallout had not been spread evenly across sectors. Looking at collapsed sales in the first quarter of 2020, RCA found that they skewed toward office deals (37 percent of total), retail and hotels (21 percent each). The industrial sector contributed just 5 percent to the total of fallen transactions.

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What CRE Will Look Like As America Reopens

Even after the worst stage of the COVID-19 pandemic ends, how we use physical spaces will be transformed for the foreseeable future.

The United States has had more than 1 million confirmed COVID-19 cases, with a death count approaching 70,000, as of Monday. And new reporting from the New York Times revealed that the Trump administration is “privately projecting a steady rise in the number of cases and deaths from the coronavirus over the next several weeks, reaching about 3,000 daily deaths on June 1 […] nearly double from the current level of about 1,750.”

The Federal Emergency Management Agency, meanwhile, is forecasting “about 200,000 new cases each day by the end of the month, up from about 25,000 cases now,” according to the Times.

So while some cities and states have begun to relax “stay at home” orders in recent days, those numbers shed doubt on whether the U.S. as a whole is on a steady path toward reopening yet.

Still, at some point the worst of the pandemic will subside. When it does, we will not be returning to the same world. That has sparked many discussions in the commercial real estate industry as to what a post-COVID-19 landscape will look like and what that will mean for the various sub-sectors in the industry. How we use buildings will change. That means layouts, density and uses will have to evolve in order to allow for people to safely come back. As just one example, restaurants will not be able to squeeze tables as tightly together as they did previously. Not many people will be willing to eat meals while rubbing elbows with fellow diners as we used to.

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Seven CRE Professionals Offer Their Takes on Work and Life While Sheltering in Place

We spoke to industry insiders in locations with shelter-in-place orders. Here’s how they are staying sane and productive.

Over the past few weeks, an increasing number of states and municipalities have issued shelter-in-place orders, hoping to contain the COVID-19 outbreak from spreading further. This has led to large-scale temporary closures of commercial properties, including the offices of many real estate firms, forcing industry professionals to work (and largely stay) at home. This has happened at the same time as children and spouses are back at home too, with schools, colleges, non-essential shops and entertainment venues closed for business. So how are commercial real estate professionals staying productive and staying sane while adjusting to the country’s new lifestyle?

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Some Initial Takeaways on How the $2T Stimulus Helps CRE

Industry pros are continuing to unpack what’s in the massive $2 trillion stimulus package, but already some items stand out that should provide relief to the CRE sector.

After days of rancorous negotiations, the U.S. Senate unanimously approved a $2 trillion+ economic stimulus bill aimed at helping the American economy navigate an unprecedented shock. The House appeared poised to pass the legislation on Friday and President Trump has promised to sign the bill as soon as it reaches his desk.

It could not come at a more pressing time. On Thursday morning the Department of Labor reported that initial jobless claims soared to a seasonally adjusted 3.28 million in the week ended March 21.

The bill is broken into several parts, with hundreds of billions allocated towards direct cash payments to most Americans and to vastly expanding unemployment benefits to be more generous and cover more classifications of workers. That alone will be beneficial, for example, by helping apartment tenants pay their rents.

And within the bill are specific measures that will provide some benefits to the commercial real estate sector.

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Commercial Real Estate Industry Coronavirus Resource Center

A page centralizing commercial real estate association responses, guides and resources in dealing with the ongoing coronavirus outbreak.

Many of the major North American commercial real estate industries have stepped up to deliver guidance and resources to the industry on how to handle the continuing coronavirus outbreak.

Here is a centralized list with links to the resource pages and statements provided by those groups.

If you have links to additional resources to add to this page, please contact [email protected]

Alternative and Direct Investment Securities Association

Statement on its upcoming 2020 Spring Conference, “The health and safety of our members and attendees is our top priority, and we are monitoring the COVID-19 (coronavirus) situation and guidelines set by the U.S. Centers for Disease Control and Prevention and the World Health Organization. We are working closely with the Rosen Shingle Creek resort to ensure that all appropriate measures are being taken to safeguard the well-being of our attendees, including the aggressive use of disinfectant cleaning procedures throughout the hotel, including the exhibit hall and meeting rooms, and the addition of more hand sanitizing dispensers readily available to all attendees.” (March 10)

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Icahn is shorting the commercial real estate market, which he says is going to ‘blow up’

Billionaire investor Carl Icahn told CNBC he expects the U.S. commercial real estate market will crumble.

Billionaire investor Carl Icahn told CNBC on Friday he expects the U.S. commercial real estate market will crumble, much like the broader housing market collapse of 2008.

“You’re going to have this blow up, too, and nobody’s even looking at it,” Icahn said on “Halftime Report.”

Icahn said he is shorting the commercial mortgage bond market and it’s his “biggest position by far.”

Short selling is a bet against stocks or bonds, with shorts borrowing shares from an investment bank and selling them in hopes that the asset will lose value. If it does drop, shorts buy the shares back at a cheaper price and return them to the bank, turning a profit on the difference.

Icahn’s short is specific to credit default swaps, or “CDS,” which are assets that back mortgages of corporate offices and shopping malls. Icahn said the housing market bubble of 2008 has “happened all over again” due to loans made in 2012 to shopping malls and more.

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If a Bank Branch Has to Close, What Are the Most Likely Reuse Scenarios?

As banks downsize their bricks-and-mortar footprint, their vacated spaces can be turned to other uses.

Banks continue to shutdown branches across the country, but investors see creative reuse opportunities for these locations.

The typical closed branch encompasses around 8,000 to 14,000 sq. ft. of space, with some branches reaching up to 25,000 sq. ft. or 35,000 sq. ft., says Walter Bialas, vice president of research with real estate services firm JLL. This is where creative reuse of space comes into play.

“Take a 25,000 square foot outparcel, for example,” says Bialas. “With larger retailers under pressure and limited growth in that sector, you have to match a user with the space. Even many restaurants are not this large, so it becomes a challenge to lease or sell the space and maybe develop a plan to divide the space for multiple users, which is why office type users often fit the best.”

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Breaking Down CBRE’s 2020 Market Outlook

CBRE provided NREI with an exclusive sneak peek at its 2020 Real Estate Market Outlook report.

CBRE sees more growth ahead for the U.S. commercial real estate industry in 2020, although the pace of expansion could slow thanks to already strong fundamentals that will be tough to improve upon combined with some broader economic headwinds as part of its 2020 Real Estate Market Outlook. Specifically, uncertainty surrounding trade negotiations, weakness in manufacturing and the approach of the presidential election season will hang over the industry in 2020.

Still, the report predicts a “very good year” for the industry.

CBRE provided NREI an exclusive first look at the outlook report. Investment sales volumes should remain near peak levels and industry fundamentals in most sectors will remain strong as well, according to the forecast.

“Next year will bring deceleration on a few fronts, but this still is an expanding economy and a flourishing property market benefiting from a robust job market, solid consumer confidence and low interest rates,” Richard Barkham, CBRE’s global chief economist and head of Americas research, said in a statement. “We’ll see resilience across asset classes such as office, retail and multifamily as demand continues to buoy those sectors. And we see transaction volumes and capitalization rates staying relatively stable.”

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Retreat of Negative Rates Isn’t an All-Clear for Investors: Mohamed A. El-Erian

A large-scale retreat by central banks from ultra-low rates and accommodating balance sheet policies does not appear imminent.

(Bloomberg Opinion) — Negative-yielding government bonds have been a significant force for a superb year of investment returns for both stocks and bonds, and many are welcoming their recent decline as an indicator of what will support the next leg up in valuations. Yet the evidence remains mixed, suggesting a more nuanced approach to longer-term investing.

The growth and persistence of negative-yielding debt in 2019 has done more than deliver attractive price appreciation on government bonds. It has pushed investors to take on more risk, pushing up the price of assets from investment-grade and high-yield corporate bonds to emerging markets to, of course, equities. It has also encouraged companies to intensify their financial engineering, often involving debt issuance to pay for stock buybacks. And it has supported a range of mergers and acquisitions.

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