Key Highlight

  • Fundamentals of real estate altered with more than +25% of businesses now closed
  • Approximately $430B in commercial and multifamily real estate debt matures in 2021
  • Indebted property owners will be forced to either update their buildings with more money, sell at distressed prices or hand keys to the bank
  • Both lenders and borrowers (owners) now forced to reconcile property values in reshaping pandemic worl

The COVID pandemic has and will continue to affect real estate fundamentals. Not only have some +25% of businesses closed this year (with more closures likely to come in 2021), the pandemic is changing how we work our livelihoods and live our lives.

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“Retail will remain just a mess, hospitality will have a very challenging year, and, in more isolated instances, office will be more problematic,” said Dave Bragg, a managing director at the real estate research firm Green Street. E-commerce is creating a glut of retail space, space in which there was already too much.   More than 100,000 restaurants, nearly one in six, closed either permanently or long-term in the pandemic’s first six months, according to the National Restaurant Association, while 40% of its operators say it’s unlikely they’ll be in business six months from now. And, because travel has tanked, some 1B hotel room nights will be unsold this year.

The United States Commercial Real Estate Services (CBRE) Group projects that property values for apartments, office spaces and retail businesses will not bottom out until mid-2021 or beyond. By the way, bottom out does not mean rebound. The CBRE anticipates that retail property “may“get back to ‘normal’ value levels by 2024; office and apartment properties may come back to “normal” property levels in 2022. From there (reaching pre-pandemic property valuations), CBRE projects office property values to rise 10% by 2023-2024 and then up to approximately 16% by 2025. CBRE projects apartment property valuations to increase some +20% by 2023 and close to +30% by 2024.

The one exception in these reduced commercial property valuations has been industrial real estate. Industrial space has only increased during the pandemic…CBRE’s expectation is that industrial real estate (warehouses and logistics/data centers) will only increase its upward trajectory through 2025 when valuation in this sector would hit approximately +36% in 2025.

According to TreppAnalytics, the most glaring distress in commercial real estate is the $529B market for bonds backed by commercial real estate loans. Delinquency rates have soared. Property owners are contending with high vacancy rates, lower rents and often lawsuits representing tenants wanting to back out/buy out signed leases as both Wall Street and Silicon Valley stalwarts relocate their operations and/or reduce their footprints.

Couple all of this with the fact that more than $2T in commercial real estate debt matures during 2025. It looks as if, according to John Murray, head of commercial real estate at Pacific Investment Management Co., “The timeout (for commercial real estate) is over.”


Thanks to Bloomberg.

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