When ascertaining the impact the coronavirus will have on investment real estate, it is critical to determine the connection between the impacts of the crisis and the type of tenancy in any particular property. Real estate has no intrinsic value, only the use of real estate has value. And this is dependent on demand. Here is what we foresee given the current situation:
• Apartments – The spike in joblessness will seriously impact occupancies. A 2018 National Apartment Association report provided that 50% of apartment renters are either “Starting Out Singles” or “Young Adult Roommates.” With job losses disproportionately impacting young adults, there is a likely risk of younger Millennials and Gen-Z’ers moving back in with the parents or sharing costs by sharing apartment units, with more individuals in each unit. Either of these trends would negatively impact apartment occupancy rates, and perhaps rental rates. Government support will help ease the disruption; the question is just how long this might last.
• Office – Office tenants who already have virtual working abilities will likely not experience the same problems as companies whose operations are closely tied to their space, such as call centers. And co-working facilities will take a tremendous hit as government mandates imposing social distancing continue. The entire co-working model, which is based on short term tenant sublease commitments but long-term underlying lease obligations on the part of the co-working company, may prove to be unsustainable in its current form.
• Retail – The decline in consumer spending resulting from “stay-at-home” rules will likely wipe out many small, medium, and mid-size retailers and restaurants, both local and national. Retail mall and shopping center owners are working with their tenants because they have no choice. But with the nature of retail continuing to change, this will not be enough for many. The best insulated will be retailers that provide staple goods, such as grocery and liquor stores. Many restaurants will likewise be unable to survive. The longer the “stay-at-home” mandates stay in effect, the harder it will be for retail stores and restaurants to recover, and the more challenging it will be for their landlords. And the effects will outlast the crisis as consumers, hit by growing joblessness, pull back on spending.
• Hospitality – Hotel vacancy rates have soared due to stay-at-home mandates, and this sector is likely to have tremendous fallout.
• Industrial – This sector may be impacted less than others, but with consumer demand projected to drop as unemployment surges, portions of the industrial sector will likewise be affected. With brick and mortar retail stores closed, the activity within the clothing industry itself has been severely affected. And this is not the only industry suffering. A brighter light will be distribution warehousing and logistics related to in-home delivery, along with the related manufacturing facilities, as needed goods are sent directly to people’s homes.
Regal Properties and its affiliate, Capital Real Estate Solutions LLC, will be monitoring these investment sectors closely. Our hope is that the COVID-19 pandemic passes as quickly as possible, but we anticipate negative medium-term impacts to the economy and investment real estate. For this reason, we plan to ramp up our investing activity for the foreseeable future. We have been challenged to find great investment opportunities over the last few years, but we believe this is about to change.