COVID-19’S IMPACT ON REAL ESTATE INVESTMENTS

Multifamily investments projected to survive COVID-19 hit to investment real estate.

Investors look to Rose City Commercial Real Estate to keep current on real estate investment trends. In support of that, our current focus is speaking to a number of investors, and firms that are resources to the real estate investment community. We wanted to learn first-hand what their COVID-19 concerns and projections are relative to their investments.  One of the most eye-opening conversations was with a property tax negotiator with decades of experience…now working for a national firm. Below is a summary of a number of conversations with key players in the industry and their outlook:

 

COVID-19 INVESTMENT BRIGHT SPOTS: MULTIFAMILY, APARTMENTS, SFRs & INDUSTRIAL

One of the surprises of our survey is the relative strength of housing during the COVID-19 Crisis. (In this case, “housing” referring to apartment investment real estate, and owner/users of Single Family Residences…SFR)

While no one contacted was speaking about how far they could push rents…I did hear that pricing is not heavily impacted to any significant degree. The good news is multifamily pricing is expected to be relatively stable…but sales velocity is projected to be lower. This sentiment was echoed by both residential Brokers and institutional investors. One of my interviewees was an investor who had bought many thousands of multifamily units over the last 4 decades. He said his experience was that people sell in good times, and bad times. He was still bullish on multifamily investing, despite calls for rent strikes, and tightening landlord-tenant regulations. He said: “The market will decide whether or not a new store or call center is needed…but we’ll still need housing!”.

Industrial: Some of the people we contacted said that they expected an otherwise solid segment to take an initial hit but rebound. Others felt the underlying fundamentals were strong enough that Industrial Real estate may fare as well or better than housing assets.

To evaluate your portfolio and how it will be impacted by COVID-19, contact us at (503)577-1034) or rick@rosecitycre.com.

COVID-19 & HOSPITALITY INDUSTRY REAL ESTATE

Hotels, Motels, from small to large are looking at a near term bloodbath on values, directly related to COVID-19 impacts. ADRs (Average Dail Rates) are expected to drop over time…but the biggest concern is that average occupancies are now in single-digit percentages for many assets. And it may take several years for improvement.  It is unknown how exactly how CMBS (Commercial Mortgage-Backed Securities) will deal with numerous defaults. But it’s hard to imagine the real estate associated with these assets trading at cap rates resembling normalcy, nor will affordable financing be readily available.  I always tell people NOT to invest in hospitality assets unless they have additional equities elsewhere. They also should seek higher cap rates (lower price per dollar of Net Operating Income) than apartments. That is because of the volatility of hospitality real estate values. One of my clients took a million-dollar loss on a 28-story hotel that was supposed to break 2 weeks after 9/11.

B&Bs Hit: We have already seen the impact on the small owners of Bed & Breakfast operators falling behind on their mortgages and the more sophisticated, institutional hospitality operators are not far behind.

 

COVID-19 & TRAVEL RELATED REAL ESTATE

Airlines from the best run…to the worst are getting creamed. In the last 60-days, Southwest Airlines (ticker: LUV) has lost 49% of its stock value, Delta Airlines (ticker: DAL) has lost 59% of its stock value, and United Airlines (ticker: UAL) has seen its stock drop 67% during that period. Multi-billion dollar bailouts may not be enough to save some of them.  Hertz’ (stock ticker: HTZ) value plunge is among the worst. They’ve lost 82% of their stock value in the last 60 days.  Avis (stock ticker: CAR) tries harder…but they’ve still lost 68% of their value in the last 2 months. Leases for these companies will likely go unpaid, as will mortgages payments for real estate owned by companies in this group.

 

COVID-19 & OFFICE+ RETAIL+RESTAURANT REAL ESTATE

Retail has been devastated. Short term, many stores are re-opening…but only allowing in 1/4 as many customers as they are used to having. Social distancing makes nail salons, chiropractors, and call centers nearly impossible to operate like they were in the pre-COVID-19 world. (Although in Texas frisky folks can now go to massage parlors due to relaxed guidelines.)  Restaurants are known for operating in a competitive field with slim margins. Many will not re-open due to debt accumulated during the peak of the pandemic.

This asset class of properties was already having problems due to Amazon and similar services providing products at the click of a mouse.  Now that customers have lived for weeks with limited access to brick & mortar outlets, many are concerned that necessity has turned many online shopping skeptics into everyday users. Shoppers may not return to the mall readily when things open back up. We have included office real estate in this category because many companies have learned how to provide full or nearly full-service levels with employees working from home. We consider investing in real estate in office, retail, and restaurants a much higher risk at this time without an attendant higher yield compensating for the higher downside exposure.

USE AN INVESTMENT ADVISOR YOU TRUST

It’s a crazy world right now…Saudia Arabia’s credit rating was downgraded Friday by Moody’s from “Stable” to “Negative”. See http://bitly.ws/8tWw. To evaluate your real estate investment portfolio and discuss how it will be impacted by COVID-19, contact us at (503)577-1034, or rick@rosecitycre.com.

 

 

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