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U.S. retail, office most squeezed by pandemic, survey finds


Triage for various commercial real estate classes during a pandemic looks like this: Retail, office, multi-family and industrial warehouse-distribution, real estate executives, investors and lenders say in a new national survey.

As part of the Covid Real Estate Impact Survey Report, a trio of Integra Realty Resources executives detailed projections for three commercial categories.

Lance Jordan, managing director at Integra’s Sacramento, Calif., office addressed retail; Anthony Sanna, executive managing director in Detroit, discussed office, and Ron DeVries, Chicago managing director, took on multi-family.

Retail is hands down the hardest hit among commercial real estate categories but its recovery will be in the middle of the pack of categories, Jordan said.

The foundation of the forecasts is a belief among survey respondents that the best scenario is that today’s depression-level unemployment returns to a more normal range in 2022, Jordan said. The worst case is for jobs recovery to come in 2024, he noted.

“Sharp declines in discretionary spending have had a devastating effect,” Jordan said.

Many retailers in local, regional and national markets were ailing before the covid-19, as shoppers shifted more widely to online purchases. “The pandemic is likely to accelerate trends already in place,” he said, and noted national retail closures in 2019 topped 2018 by 35 percent.

Seventeen major retailers filed for bankruptcy protection last year. Sixteen, including J.C. Penney, have filed this year.

A list of most endangered retail types, according to Jordan, would be topped by Class C unanchored retail strips, enclosed malls and sit-down restaurants. The best-case scenario is for a neutral to 5 percent mortality rate for such properties, Jordan said, and put the worst case at 10-plus percent.

A lot of retailers have had a double-trouble situation on the sales side, having to halt sales at physical locations while losing customers to online sales.

Accordingly, Jordan says the best-case scenario for retail property vacancy increases is neutral to 3 percent. “The worst is for upward of 5 to 10 percent,” he said. 

Capitalization rate drops will follow the property value declines caused by the vacancies, Jordan predicted, putting the best hope for return on investments at neutral to 2.5 percent and the worst at upward of one half of 1 percent.

A worst-case value drop for a 90,000 square-foot retail property would be 20 percent.

Unsurprisingly, “We’re expecting a pause on new retail development until the pandemic passes,” Jordan said.

Office Market

The office sector has received a “relatively” hard blow and will be slow to recover from it, said Integra’s Anthony Sanna in Detroit.

The best hope, Sanna said, is a return to normal in two years. A worst-case for market normalization is four year, he said.

The pain of the blow is less for Class A office properties at the top of the market. Their stronger tenant mix and, in many instances, institutional ownership help to shield them, according to Sanna. Class A “is less susceptible to non-payment” of rents, he noted.

Looking at office-space options likely to be less popular after the pandemic, Sanna cited co-working and collaboration platforms. They may be seen as having greater risks, he said.

“The new normal may be for cleaner, safer properties,” Sanna said, and predicted working remotely may become a more viable option.

The rents that do get paid will almost certainly be lower over the next couple of years, said Sanna. A worst-case scenario for rental rate declines is 10 percent. The best case is “neutral,” he said.

The outlook for cap rates, Sanna said, is an increase of one-half to 1 percent.

Office building deals are still getting done, but in fewer numbers and at lower values, Sanna said. “Early evidence is a 4 to 6 percent drop in deal value.”

Sellers, he said, are approaching buyers with discounts to keep the deals alive.

Job growth is the key to any return to health for the office sector, according to Sanna. “The rebound of employment rates will dictate how well and soon the office market rebounds.”

Multi-Family Recovery

Ron DeVries in Integra’s Chicago office said survey responders expect the multi-family segment to be the quickest to recover when the coronavirus pandemic subsides.

As with the other sectors, success regaining jobs will determine how quickly multi-family returns to health. Tenants of non-luxury multi-family properties are the workers losing jobs and less likely to get work-from-home options form their employers, DeVries said.

Rent reductions could help keep rent-payment losses in check over the coming weeks. Also, rates for new tenants could go down as demand declines, DeVries said. “The worst case is an 8 percent drop in rates,” he said, though he noted there is strong belief that multi-family recovery cold come in the next 18 months to 22 months.

In the meantime, cap rates could move up to 1.5 percent as a result of debt and investment- market trends.

Trend watchers also expect multi-family rentals are likely to strengthen their standing as a go-to-option for workers after the pandemic, just as in the years after the Great Recession, according to DeVries. “Pressure will be on families to continue renting,” he said.


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