COVID-19’s Impact on Commercial Real Estate

Covid 19 has had a tremendous impact on every single industry. No business, brand, or market was left untouched by the unexpected damage of this rapidly spreading virus. Commercial Real Estate was affected almost immediately. Dating back to March 2020, CRE started to experience drastic changes. According to an article on Deloitte, the CRE industry experienced a considerable decrease due to trade activities and occupiers’ businesses being shut down.

Let’s take a look at some of the ways Covid has impacted the CRE industry’s fundamentals and operations. Due to increased risk, most lenders in the market have become extremely cautious. After three years of relatively low levels, the commercial mortgage-backed securities delinquency rates have moved up. With an increase in costs and rent delays, some property owners face issues with short-term liquidity management. Many CRE Borrowers in popular sectors such as hotels have already applied for debt relief for such matters. In submarkets like Manhattan, we saw a 25 percent decrease in leasing volumes, which is the lowest it has been since 2013.

In terms of capitalization rates, these tend to vary by property types. The rates for mall and hotel REITs increased by bps rates of 200–400, whereas data centers and cell towers have only risen about 30 bps. There have been many valuation concerns along with the increase in uncertainty, so new investments have begun to slow. In contrast, alternative sources of capital such as dry powder present hope for investment opportunities. As stated in the Deloitte article, from a survey conducted by Pension Real Estate Association: “nearly 74% of respondents have shelved their CRE investments plans and 63% were worried about uncertainty in property appraisals.”

Aside from the markets, day to day CRE operations were also significantly impacted in both negative and positive ways. Social distancing and new government regulations caused the closing of many shops, offices, malls, living/coworking spaces, and other buildings with similar functions. As thermal checkpoints, cleaning, sanitation, and security have become a top priority, operational costs have continued to increase. In contrast, there has been a spike in demand for goods and services from warehouses, pharmacies, e-commerce players, and grocery stores.