Commercial real estate is an industry that thrives on change, but 2020 has been a wild ride that has left many wondering, “Where do we go from here?” Real estate visionary, Sam Zell, said it best when he said, “Real estate isn’t just about buildings as inanimate objects. It often reflects the pulse of the nation.” As it stands today, the pulse of our nation lacks a clear path for stakeholders to follow and has created a very unique and challenging environment that even Zell, an industry thought leader who is always two steps ahead, is hesitant to advise jumping into for now. So where DO we go from here? Should real estate professionals and investors just all go on a long vaca…err… stay-cation?
‘The bid-ask gap’ – Valuing commercial real estate during a crisis
From an investment standpoint, the current ‘wait and see’ attitude from buyers and investors has caused a major dip in activity in the second quarter. According to data provided by CoStar, second quarter investment sale transactions were down 48% nationally over Q2 2019. Moreover, pricing and cap rates have stayed relatively stagnant, indicating sellers are sticking to their valuations despite a major drop in demand. The sharp and sudden decline in sales volume likely points to significant pent-up demand in the future.
Buyers who are closing deals today are generally looking for one of two things: essential businesses that remain strong, or the ability to purchase an asset at a discount. However, most landlords are reluctant to bring their property to the market under the current conditions. It’s possible that some will be forced to the market in distressed sales, but foreclosures have yet to bubble to the surface and probably won’t for some time. The direction of the market will largely depend on a number of factors including the prospect for additional federal relief, and the duration of the pandemic.
Preserving a stable tenant mix in existing holdings is essential to keeping balanced portfolios and freeing up capital to pursue opportunities as impacts of the COVID crisis begin to subside. Even in normal times, open lines of communication between landlord and tenants may be one of the most important aspects to maintaining healthy investments and business relationships. Each business has a unique set of circumstances to deal with stemming from the pandemic, and they need to be addressed and understood accordingly. In addition to tracking empirical data like sales volume, it is important to explore innovative measures to prepare for the future as the virus isn’t likely to disappear in the short term.