While there are plenty of reasons to be optimistic about the commercial real estate market—even in the midst of a pandemic—but investors should also have realistic expectations about the recovery. With a prolonged shutdown of businesses, there will likely be a slow recovery period. More importantly, a vaccine will be essential to a true recovery.
“Any forecast needs to anticipate the possibility of a slower-than-expected recovery in employment and recovery from the long-term business closures triggered by the pandemic,” Dianne Crocker, principal analyst at LightBox, tells GlobeSt.com. “Also, until there is a widely available, reliable vaccine for COVID-19, our economic recovery will be constrained. I expect the recovery from this economic downturn to be very uneven. Recovery is going to vary by metro as some were hit harder by COVID. A metro like New York City saw much more impact from COVID than many smaller metros and of course, suburban and rural communities did. Different levels of impact has resulted in inconsistencies in reopening, which further perpetuates an uneven recovery.”
The recovery will also be uneven in terms of asset classes. As we have seen during the pandemic, some asset classes, like industrial, have benefitted from the pandemic, while others, like hotels, have been hit hard. “Right now, industrial, multifamily and vacant land are dominating much of the activity,” says Crocker. “As federal assistance that protected property owners from the impacts of rent non-payment fade, we could see foreclosures tick up and the level of distressed assets in the market increase. As owners and lenders deal with distress in coming quarters, I’d expect to see more reliance on auctions as an avenue for reaching prospective buyers to divest properties quickly and efficiently.”
Crocker has an optimistic overall outlook for the commercial real estate market, but overall, the market is split on the issue. “It’s really a mixed bag just due to the sheer scope of the impacts and the fact that there’s no precedent for comparing today’s downturn with anything that any of us have experienced before,” she says. “The best investors can do is track the economic barometers, listen to trusted experts and be very circumspect with their assumptions about property rents, occupancy and price appreciation.”
LightBox recently conducted a survey to better understand industry confidence, and found that confidence had declined from June to July as cases spiked. “This led many to grow concerned about the duration and impact of the economic slowdown in addition to a pending presidential election,” says Crocker. “If fall brings an uptick in cases, we could again see confidence take a hit. Our October survey will be very telling, as will our third quarter data on metro-level trends, which will likely show certain metros on a faster path to recovery than others.”