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Comments (127)

May 4, 2020 - 9:32am

I think no one has any idea what will happen. This is a totally unique situation- unlike any downturn in living memory.

That said, there are enough industries in dire straits that I have a hard time believing that RE won't be significantly affected.

May 4, 2020 - 9:40am
whomstrecession20:

going to bounce back as per usual once this virus is gone?

This is more of a natural disaster situation, the job loss is due to imposed gov't mandates. Very difficult to forecast next steps with precision. How RE performs in the short and long run are difficult to state with accuracy (as is the path of the virus itself).

As to the usual 'bounce' you imply, real estate has actually fared quite differently after each of the past several recessions. It's all supply and demand at the end. If the economy 'turns back on' or whatever, people will still need places to rent and work. How much and what they can pay is the question, but that will be very market by market, asset type by asset type this time around. This is a very different situation than 2008.

The real question to ask, is 'will the world enter a mild recession, deep recession, or some form of depression', the results on real estate require something of that knowledge. As of now, we do not know, but the 'markets' (meaning stock equities), are betting on the milder side of the world.

If you want to bet against the Fed and its money hose, go ahead, my stomach isn't that tough!

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May 4, 2020 - 10:06am
whomstrecession20:
Why is no one talking about the downfall of RE after the Corona virus?

Because it isn't going to happen.

Why is no one talking about our shoes forming a collective consciousness only to rise up and take over society?

Commercial Real Estate Developer

  • 6
May 5, 2020 - 1:40pm

what about all the businesses realizing they can keep their employees working remote and cut their expensive office space?

won't there be an oversupply of available commercial re?

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Most Helpful
May 5, 2020 - 2:14pm

I do not doubt that some businesses will take that approach. I do, however, have strong doubts that it will be widespread, for a couple reasons:

  1. Office leases are typically 5 to 10 years long, if not more. Even if a business owner realizes today that they don't need that much space, they might not be able, or cost effectively able, to change that overnight.

  2. A tremendous amount of business owners are conservative. I don't mean that in a political sense, although it's often the case, but instead in a worldview sense. While I sit here adoring the freedom work from home provides, the owners of my company are itching to get back into the office. One of the two owners ignored the shelter in place order just so that he could go to the office all day, even though no one else was there. For generations of Americans, work is sitting at their desk, and while underlings might be far more imaginative, they aren't the ones cutting the check.

  3. There are a number of productivity concerns, both in terms of distractions and motivation. I have yet to see any studies on if there are actual drop-offs in productivity and which types or levels of employees that would impact the most, but perception can also be reality. It would be wrong to discount the paternalistic instincts of much of corporate America.

  4. Even if business owners can get out of their leases and change their mindsets to both physical space and their employees, one of the beauties of real estate is that a building does not have to be static. Class A products in urban cores will lease up either way - even if instead of 30 tenants they now have 75 sharing the same amount of space. Lower tier buildings in urban cores, or in 80's and 90's suburban office parks, can be renovated, repurposed, or demo'ed. With the current housing crisis, this could be a tremendous opportunity for redevelopment. I'm not saying there won't be some pain from time to time, but real estate always works in cycles anyhow.

To be fair, I wonder about this too and am talking to an ex-Hines guy who now runs his own office firm this week about it. I've been playing around with a move from apartments to office a lot lately and I can't say that I'm not intrigued by what some leaders in the space have to say about things.

Commercial Real Estate Developer

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May 5, 2020 - 6:14pm

This is true, but you also will see reversal in some of the densification trends / open office concepts that offset this. People won't want to work on top of each other in the future the way you see now with benching, open office, co-working etc.

Oversimplified example - if a firm sees 50% move to working from home post-Covid, but increases the sf / person they're leasing by 100% you end up in the same spot.

May 6, 2020 - 12:13am
AndyLouis:

what about all the businesses realizing they can keep their employees working remote and cut their expensive office space?

won't there be an oversupply of available commercial re?

I think everyone hasn't fully come to terms with that. Commercial real estate is fucked.

Get busy living
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May 6, 2020 - 6:34pm

I'm not sure what the $ trade off is, but remember that for every dollar you save in physical office space, there's likely an upgrade in information technology investment to support your now remote infrastructure... one being hundreds potentially thousands needing to log into a secure network remotely, versus the wired direct connection at the office.

Obviously costs could decrease making this more feasible, but there are real financial costs elsewhere that are afoot when cutting your leases.

May 4, 2020 - 12:07pm

Yah cause that's not happening right now or anything.

"Who am I? I'm the guy that does his job. You must be the other guy."
  • 3
May 6, 2020 - 12:15am
MonkeyWrench:

Yah cause that's not happening right now or anything.

Yeah. If they still exist. How many of them are going to die off when the already low pre-COVID levels never recover? They're dead men walking

Get busy living
  • 1
May 4, 2020 - 10:36am

We work in real estate investment, we can't underwrite recessions!

On a more serious note, real estate is cyclical and will bounce back. Certain asset classes and markets will take longer to recover than others, and we are absolutely talking about that. I work in multifamily and we've received a bunch of calls from institutional investors overseas. Low interest rates are here to stay, where else are these groups going to invest their cash?

May 4, 2020 - 11:48am

They'll still use it. But they won't be willing to pay as much, which can sink equity values fast.

I'm not a real estate bear generally. In fact I suspect the malls have gotten too cheap.

But I do expect somewhat lower NOIs and somewhat higher cap rates on average. Which is fine, on average. But a weaker average means some portfolios will be in bad shape.

May 4, 2020 - 12:11pm

It's all relative. Use WHAT specifically? Pay as much for WHAT specifically? Office? Probably not. Hotel/retail will come back as soon as people a) hit the point of 'fuck it' and want to live life and/or b) there's a reliable mitigation strategy implemented/discovered (whether that comes in the form of contact tracing, etc.). Industrial/Multifamily will need to be there as long as people need things and physical space. Look at what's been going on with e-commerce/supply chain the last couple of months. What everyone is talking about specifically relates to the office sector. There are a lot of other real estate assets out there.

"Who am I? I'm the guy that does his job. You must be the other guy."
  • 3
May 4, 2020 - 3:01pm

I'm going to be starting a Cave Development Opportunity Fund here soon.

Commercial Real Estate Developer

  • 8
May 4, 2020 - 3:29pm

Downfall? Just a blip (huge blip) that will pass. Institutional money isn't going anywhere. Our partners are super fucking bullish. That said, they are a little more cautious and not nearly as interested in retail as they once were, but industrial in our markets is hot and multifamily is not too far behind. Not all is doom and gloom.

May 4, 2020 - 3:57pm

It's still pretty early.

If you do not think this will have a long term impact on UW guidelines for capital providers you are insane.

Array
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May 4, 2020 - 5:19pm

Didn't throw any MS, but this is a low-quality post in which you didn't even make a case for the downfall.

“Doesn't really mean shit plebby boi. LMK when you're pulling thiccboi cheques.“ — @m_1
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May 5, 2020 - 12:37am

Everyone is going to vacate their homes, condos and apartments to move to the forrest...

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.

  • 1
May 5, 2020 - 12:01pm

Bullish on Hobbit-holes and The Shire submarket.

Commercial Real Estate Developer

  • 3
May 5, 2020 - 10:18am

Hi,
Yes most of the people are seeing the changes happening in RE but people believe it will come back again and that's what keeps them moving! Let's see how COVID-19 is going to change our normals...

May 6, 2020 - 12:19am

Residential will be fine.

Commercial is going to see a protracted slowdown.

Commercial office space is fucked.

Hospitality is super fucked.

BAU isn't coming back, everyone is still trying to shut themselves otherwise. Things will be different and dollars are going to be spent elsewhere. I don't see the next decade being good for pretty much anything that isn't living quarters.

Get busy living
  • 2
May 6, 2020 - 1:51am

Industrial is fine, in fact it should come out of this stronger than ever.

Office is not that fucked, as there will be a shift back towards more SF per employee to promote social distancing, offsetting the potential downsizing to due work from home.

Retail will be more challenged for a while, but long term shouldn't be too fucked. Eventually things should go back to normal.

May 7, 2020 - 3:00pm
smeagol97:

Office is not that fucked, as there will be a shift back towards more SF per employee to promote social distancing, offsetting the potential downsizing to due work from home.

I don't think that will be the case. My firm realized how well things are running with everyone working from home. They plan to use even less floors in the building and are working on a rotation system where people take turns to share offices in a week.

I doubt my firm is the only one that noticed how well things are running. Offices that have firms from industries where working from home is impracticable, like law, where you need to be able to print out drafts of abundant legal documents to review them, will be ok. But for other industries, I think companies will be leveraging WFH to cut costs and instead investing those saved cash flows into software and hardware.

Array
May 6, 2020 - 3:13pm

Thanks for the insight prospect. How old were you in the last downturn? 8?

Array
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May 6, 2020 - 3:34am

In fact once the pandemic is over, it will be Time to make strategic investments in distressed real estate assets. The funds are sitting on sufficient dry powder to make these investments. However, the situation need to stabilize before one could see a traction in the RE investments.

I expect that there could be certain behavioural changes which will have a long term impact on the overall real estate industry. Players who adapt well are set to perform well.

May 13, 2020 - 2:02pm

Agree with your comment. I would like to add that the different sectors (residential, retail, office, hotel etc.) will react very differently on the COVID-19 pandamic. Most problematic is ofcourse retail. I think a lot of shops will go bankrupt, so funds will take a serious hit on rental income. Replacement of those tenant can take a long time and the rents will be probably lower, since more peoply are getting custum to buying their products online

May 8, 2020 - 1:38am

Don't think this will happen. In addition to all the other points already made, I think it comes down to highest and best use.

One of the true value drivers of real estate is its versatility as an asset class. In the unlikely event that, say, the office sector completely collapses, the buildings will be repurposed and redeveloped for whatever would serve society the best way.

And lenders, ever conscious of diversifying their loan portfolios, will be there waiting to finance whatever the repurposed product is once debt markets stabilize.

May 8, 2020 - 3:37pm

What are thoughts on retail leases mathematically not making sense anymore?

If you have a phased opening, even over 12 months, that implies each retailer will only be allowed to have x number of shoppers/diners/etc

the lease on that space was priced assuming $x/sf would be moved in the space, providing for y% of total revenue to pay the landlord

the landlord took out a loan, even if it wasnt super highly leveraged; that loan has a payment that is z% of the landlord's net income

if shopers/diners/etc are reduced by 50%, the entire equation is thrown off

even if you say "yes, but people will wait in line, or the same demand will be htere just over a prolonged time (think, instead of a 15 min wait, 1.5 hr wait to be seated) that would back into an assumption that makes the $/sf value of the lease whole"

I don think that would happen. somehow, the math behind the $/sf value will be thrown off (reduced) causing deflation (at least for retailers)

The US economy is what... 70% consumption? Idk the exact employment numbers, but if you have massive devaluatoin of the leases, which causes losses to lender, which cause losses to the investors, eventually x% of employees will see some kind of hardship that will also feed into rents... mid market apartments are probably the best space bc you can have lower tier renters or renters moving-down from upper tiers.

Just some thoughts

May 8, 2020 - 6:50pm

To add on another mathematical piece, consider this....

Retailers don't have to report online sales by store. What's been legitimately proven is that retailers sales in a zipcode increase when they open a physical store. However, they're not required, nor does it seem like a legitimate ask by the landlord, to provide the zip code sales. Landlords are completely in the dark to the true value that physical space has in the retail world. Moreover, since it's outside in almost all cases what are considered "Sales" required to be reported, it's outside of being captured in % rent. It completely throws a wrench in capturing provided value. But a landlord can't say "hey retailer Z, you are required to change your accounting systems to geographically categorize your sales and allocate it to our store." It mathematically doesn't make sense for something which mathematically was crystal clear before. Sales, COOs, all have this dark area in favor of tenants

May 10, 2020 - 12:52am

To say real estate is dead is too simplistic however I believe bid ask spreads will widen and things could get bloody. However what were darlings in the past I'm sensing uncertainly. This could be good, right. "Tension" creates a market: bulls and bears. Previously say Bay Area real estate "will always go up" so cap rates went down down down. Some tension is healthy and I am seeing it:

  • West Coast multifamily, a sector I rode through most of the past decade was already facing record low cap rates, 20% YOY hard cost growth, and plateauing rent growth; has been hit with continued tenant protection threats. Depending on who you ask, pricing guidance is lowered and retrades are occurring. However sellers know their worth. There are some difficult conversations and absolute positioning right now. The stare down - like at the Big Game (Cal-Stanford).

  • Having gone through the GFC and now COVID, I think it's very hard to start a firm or new division during a downturn. I feel it favors incumbents with the dry powder and proven track record. More so because lenders get more conservative. Land values for development are the most volatile.

Things change quickly. I'm bullish San Francisco will bounce back faster, for example. My barometer for that is the ease of flexibility in the labor markets (WFH available?), overall household savings, and propensity for people to help others (mask wearing).

My wife owns a retail store. I think the 15 year march of e-commerce destroying brick and mortar retail will continue. There will be pockets of resistance from a growing Buy Local movement. Just like COVID might have help further expose the downsides of over reliance on a competitor country (starts with C); this dress rehearsal of the future also shows the world of no retail, no jobs, Main Streets going "dark." Delivery apps taking too much commission from mom and pop restaurants, and the backlash. I tip the restaurant employee who is processing my takeout. Although this more OFF topic, I hope retail, particularly locally base retail will win more fans. That there is a hidden cost to lowest price and convenience.

  • as Real Estate bros we have an interest that the Tech bros don't break every law/rule that gives real estate its unique value. I am quite the Luddite but Uber breaking rules on taxi supply is like someone diminishing the Value of your entitlements you spent 4 years obtaining for a development. Same with AirBnB, etc. These are the everlasting threats to real estate not as an asset but to the values today. Why the F would I invest millions of dollars if people are breaking the rules rampantly.

  • population growth and immigration: when I was an analyst I was at our company wide conference in at a resort in Florida and I pulled aside the head of research for the company (PERE top whatever). I was inquiring about an international transfer and then the conversation went towards why the US market is the place to be. Population growth. Anyways, Real Estate bros should be pro-Population Growth. If that is materially reduced, that's a threat. How will a post-COVID world affect family formation, children, and immigration (particularly chain migration and green cards)?

    Anyways sorry for what has become a rant

Have compassion as well as ambition and you’ll go far in life
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May 11, 2020 - 8:33pm
thebrofessor:

https://link.medium.com/YoDtqzKFp6

prospie teddythebear CRE C.R.E. Shervin any truth to this? I thought class A office would be most insulated, no?

I think CRE is a MF guy and, although I've underwritten office, I'd be lying if I said "I'm in touch with office." But anyway, my guess is she'll be wrong (I haven't read her whole article but I think I get the gist).

A commercial real estate research guy recently said on a podcast, regarding office:
- working from home is not ideal
- desired sf per person will go UP bc of this (these things may have been touched on this thread elsewhere)

Even me, personally. I want a BADASS office some day with antique guns on the wall and people closing deals and kicking ass. And I do not want that office to be inside my residence. The rest of you fucking cowards can shuffle to your couch to rip bong hits in your pajamas in between zoom calls drowned out by screaming kids. Do you see world leaders doing that shit? Fuck no.

"When you're in the middle of a crisis, you tend to overestimate the permanence of its effects" is a quote that recently caught my eye. And I am guilty of doing that in the last crisis until an old bald REPE fund manager gave me some words of wisdom.

May 18, 2020 - 4:10am

>"When you're in the middle of a crisis, you tend to overestimate the permanence of its effects" is a quote that recently caught my eye.

I think this is a really salient point that people are missing out on. We all have far shorter memories than we'd like to imagine, and once people have been working from home for 10, 12 months they'll realize why offices exist. Building the relationships for a strong organization is far easier done face to face than over the phone or zoom, all the informal ways people do business in an office cannot be replicated online, and if you're new, good luck trying to learn the ropes from your couch. People might go back to cubicles, they might reduce staff, or allow more WFH than they currently do, but offices going away forever? Not gonna happen.

May 11, 2020 - 9:55pm

That was hard to read, came off like a tweet storm with a lot of magical thinking.

“Doesn't really mean shit plebby boi. LMK when you're pulling thiccboi cheques.“ — @m_1
May 12, 2020 - 12:16am

Tough to say really. In order to understand Class A, we really need to understand the underlying tenant. Most of Class A tenants tend to be organizations that are able to work virtually since they tend to conduct business through primarily through phone/email/computer. Other businesses such as law firms which may require in person meetings/depositions/signed contracts can still be done digitally but due to their business, dont see that going totally digital. Honestly, I wouldn't be surprised if Class A takes a bigger hit, but it will really come down to how much the landlords are willing to negotiate. I'd rather offer concessions and fill it up with tenants from Class B properties. Either way, I imagine values drop across the office space, but it will also depend on various factors such as tenant weighted term remaining, RSF, concessions, ease of access, etc.

Array

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May 14, 2020 - 12:43am
teddythebear:

Tough to say really. In order to understand Class A, we really need to understand the underlying tenant. Most of Class A tenants tend to be organizations that are able to work virtually since they tend to conduct business through primarily through phone/email/computer. Other businesses such as law firms which may require in person meetings/depositions/signed contracts can still be done digitally but due to their business, dont see that going totally digital. Honestly, I wouldn't be surprised if Class A takes a bigger hit, but it will really come down to how much the landlords are willing to negotiate. I'd rather offer concessions and fill it up with tenants from Class B properties. Either way, I imagine values drop across the office space, but it will also depend on various factors such as tenant weighted term remaining, RSF, concessions, ease of access, etc.

My friend who's a partner in a big law firm says office space is the 2nd biggest expense after payroll. COVID might impact their future space planning.

Have compassion as well as ambition and you’ll go far in life
  • 2
May 12, 2020 - 12:02pm

I'm not going to pretend I have a crystal ball, but I think the article takes too many liberties when extrapolating ideas and small data points to make sweeping predictions.

The title alone is absurd. "The office is dead" and "Get ready for the commercial real estate apocalypse" are alarmist for clickbait purposes. The actual institutional studies I'm reading are projecting slightly higher cap rates, slightly lower deal flow, relatively flat rent grown for 2020, marginal rent grown for 2021, and then strong rent growth for 2022.

"It's something no one could have foreseen three months ago," in regards to remote work is also wrong and makes me wonder how in tune the author is with the industry. Remote work isn't a new idea at all. The crisis has expanded it and normalized it, but it didn't create it. Further, while many like me enjoy the practice, many others do not - or at least not permanently. Cities are also not "losing their sheen" and I complete reject the idea that this crisis will cause Americans to migrate to the middle of nowhere in droves.

Will vacancy rise across the board? Yes. Will rents be stagnant for a while? Yes. Will there be changes in the office market brought on by changing attitudes to work? Yes. None of that implies death or some sort of real estate apocalypse though.

Commercial Real Estate Developer

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May 11, 2020 - 10:45pm

Residential here, been waiting to chime in until all the May rents rolled in to see if there was any difference from last month. As a residential landlord with mixed class units, things are relatively normal. Subs are hungry for long term work right now too, better rates.

May 15, 2020 - 2:42pm

I would guess multifamily is going to suffer over the next 24 months. Dr. Linneman gave a presentation a week ago, and posited that employment won't reach 10% again until Fall 2021, and maybe reach pre-Covid levels in Fall 2022, assuming ongoing aggressive government intervention. The four million people graduating college each year are unlikely to rent apartments now, if they can't find a job. Middle-class people are already tightening their belts and reducing credit card debt. A lot of the MF investors who underwrote 3-4% vacancy with 5% annual rent bumps are probably going to struggle over the next two years.

May 18, 2020 - 11:24am
CRE Entrepreneur:

. A lot of the MF investors who underwrote 3-4% vacancy with 5% annual rent bumps are probably going to struggle over the next two years.

Good! Those people deserve to lose their shirts.

You know who won't suffer? The people underwriting 5% economic vacancy with 2% rent bumps.

We should be celebrating the fact that aggressive investors/lenders are going to take a massive financial hit. It means opportunities in the distressed space, but moreover, it means a couple of years where people actually underwrite deals intelligently. The entire MF space has been a giant game of musical chairs the last 6 or 7 years.

I've talked about this with others on this site, but you can only trade a "value add" Class B multifamily asset in suburban Texas so many times before there isn't any fat left on that bone. It's the same deals trading over and over every few years, with each successive person marking it up to 20% to hit their numbers (because rent growth was never going to match their underwriting) and hoping the next sucker out there meets their price. Well... whoever is holding that bag right now is the person who is still standing when the music stopped.

May 18, 2020 - 1:49pm

Ozymandia - Call me optimistic, but I doubt a 5% economic vacancy assumption and 2% rent bumps is even going to be sufficient in many markets and in certain product types. We're even facing the significant possibility of deflation over the next few years, which would certainly impact rental rates. (https://www.frbsf.org/economic-research/publications/economic-letter/20…)

May 18, 2020 - 6:04pm

I think "downfall" is a pretty strong term, people will always need shelter. I agree we might see a downturn due to the rise in unemployment and tighter lending from the banks. I buy distressed properties so for me a downturn is a good thing as it gives me more buying opportunities.

Steve Keighery

New Orleans House Buyer

New Orleans Property Investor https://homebuyerlouisiana.com
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