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Dr. Norm Miller: What do we know about the impact of Covid-19 on Residential and Commercial Real Estate

Posted by Jeff Finn on Jul 6, 2020 6:00:00 PM

The July 2, 2020 episode of The RealNex Webinar Series featured Dr. Norm Miller on the subject “What do we know about how Covid-19 is impacting Residential and Commercial Real Estate?” The hour-long session was packed full of valuable insights into current trends and future predictions across each primary real estate asset class.

Dr. Miller set the stage with the social and economic impact of the pandemic. Covid-19 is not set in isolation. It has been exacerbated by social unrest, nationalism and trade wars. Fortunately, it has come at the end of a 10-year economic expansion with historically low unemployment, interest rates and inflation. Nonetheless, the economy has swiftly moved into recession with massive unemployment and far worse under-employment. GDP is now expected to drop in the 5-7% range. Yet, even with the staggering $4 Trillion pumped into the economy interest rates and inflation are expected to remain low. This stimulus together with forbearance on rent and debt has mitigated the worst case of an economic lock-down, but as the federal unemployment subsidy sunsets and PPP loans burn off what comes next?

According to Dr. Miller, after 3 months of lock-down and a faltering re-opening the commercial and residential real estate markets have been dramatically impacted. How and where we work, shop, interact and live have all transformed. While each geography and property type has been impacted differently, they have all been impacted in terms of value, operations and revenue potential.

We are currently in an opaque period with a new normal emerging, but yet to exist. With more questions than answers, the real estate market velocity has precipitously declined and price discovery is far from clear. On the residential side listings dropped nearly 90% in March and by May year-over-year sales were down 60% in some markets. Ironically, with low interest rates and exceedingly tight supply, bidding wars have ensued for choice homes. With strong demand and markets reopening, residential listings have begun to recover and are now down only 5% in certain markets.

Expect to see a tail of two markets, with low end residential witnessing defaults and foreclosures leading to a distress sales environment, while upper end markets remain solid with limited distress. One weak spot in the upper end would be caused by a flight from higher end CBD condos and apartments to larger lower cost suburban dwellings.

The commercial side will also see a duality, but by property type as well as strata.

The most negatively impacted will be:

  • Hotels
  • Senior Care
  • Airport & Tourist Retail
  • Student Housing
  • Regional Malls
  • Co-working

While the least impacted or even positively impacted will be:

  • Data Centers
  • Bio-Tech
  • Industrial – Warehouse/Distribution
  • Self-Storage
  • Medical Office
  • Grocery and Drug Store
  • Ghost Kitchens
  • Micro-Fulfillment Centers

The key Questions Dr. Miller went on to address included –

  • How much are rents down by property type?
  • How will values be impacted?
  • Will we see distress and where?
  • How will protocols and design change in the future?
  • How will retail and office change?
  • What are the silver linings?

Indicative of the impact on rents, collections have dropped virtually across the board:

  • Industrial: ports most impacted, but 95% of tenants paying rent
  • Data Centers: Demand up
  • Multi-family: Collections down up to 19%
  • Retail: Down by as much as 50%
  • Office: Down 12%
  • Hotel: Down up to 85%

Based on trough REIT pricing, except for industrial and data centers, values are estimated to be down accordingly.

  • Data Centers: Up as much as 12%
  • Industrial: Up 1-2%
  • Multi-Family: Down 8%
  • Strip Retail: Down 13%
  • Malls: Down 19%
  • Office: Down 16%
  • Lodging: Down 37%

Trading has been thin since the pandemic started according Real Capital Analytics with May Year-to-Date declines in asset value sold of:

  • Industrial – 65%
  • Multi-Family – 80%
  • Office – 82%
  • Retail – 82%
  • Hotel – 90+%

With market pricing and outlook still opaque, sellers are holding on to pre-crisis pricing and buyers are waiting for distress levels to move in. With $100 billion raised in new distressed funds, it will be interesting to see how quickly and at what point price discovery is realized.

In the meantime, owning real estate has become more complicated and more expensive. Everything from new cleaning protocols, surfaces, air handling, touchless technology, 5G and more will be required to attract and retain tenants. Further, obsolete malls, department stores, hotels and campuses will need to be reimagined for a future more in need of distribution, micro-fulfilment, medical and multi-family.

Even with the success of work from home, the need for office space is not dead. People do want to convene and collaborate. While telecommuting and work from home will continue a new hybrid is anticipated with flexible and staggered work schedules enabling the best of both worlds. With more private offices and space allocated per employee offsetting less people at work at the same time, more space may be demanded but rents will be held in check.

As far as distress, it will not be a repeat of the great recession. Lenders don’t want properties back and are working with borrowers to weather the storm with interest only payments or term extensions. Going forward however underwriting will be tighter with Loan to Value dropping into the 50-60% range, higher cash reserve requirements and stricter tenant credit analysis.

Dr. Miller closed with the silver lining:

  • Inflation and interest rates to remain low through 2021
  • Construction costs to decline
  • Limited Foreclosure and Distress sales
  • Repositioning opportunities abound
  • Some Property Types thriving
  • More efficient and productive consumer/employees will yield higher savings rate

Click the link to view the full replay of the session.


About Dr. Miller

Dr. Miller has numerous academic articles and books on housing, brokerage, mortgage risk, valuation, climate change, sustainable real estate and many other topics. His research on housing market analysis and forecasting spans three decades. He has been organizing conferences, panels and speaking on sustainable real estate while working with CoStar and CBRE on research exploring the financial payoffs from green approaches. He is interested in green real estate strategies around the world and learning about all cultures and economies. Recently he has worked with the NMHC and NAA on forecasting multi family demand and supply barriers by metro. His keynote talks focus on long term trends. He is also starting to spend more time on the analysis of proptech trends, blockchain applications and natural disaster impacts on real estate markets.

He has traveled extensively and is a frequent speaker providing economic outlooks and real estate strategies for challenging times. He is working with his long time research colleague, Michael Sklarz, founder of Collateral Analytics acquired by Black Knight in 2020. He is also a Vice President and Faculty member of the Homer Hoyt Institute (MSASI) world class think tank, based in North Palm Beach, FL.

Specialties: Housing, commercial real estate, sustainable real estate, green strategies, forecasting, AVMs and risk analysis along with economic outlooks.

Topics: RealNex Webinar Series, #Covid-19

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