COVID-19’s Effect on Commercial Real Estate in the Southeast

August 25, 2020

COVID-19’s Effect on Commercial Real Estate in the Southeast

August 25, 2020

Our world is filled with many unknowns due to the global pandemic, but the future remains bright. In fact, Berkadia’s 2020 Mid-Year Powerhouse Poll fielded in early July found that Berkadia’s investment sales brokers and mortgage bankers are confident in the future of the commercial real estate industry despite the effects of the COVID-19 pandemic.

While we expect changes in our everyday lifestyles for the foreseeable future—more remote working, wearing of face masks—our industry continues to move forward and help clients in this unprecedented time. During the early summer months in the Southeast region, we have seen collections and leasing activity remain steady, many properties refinanced, a pickup in acquisitions, and new methods of communication take charge. While uncertainty remains at play, we have seen positive progress from where we were when the pandemic first hit.

Collections and Leasing Activity Remain Steady 

Collections and leasing activity have held steady despite the impacts from the pandemic. According to Berkadia’s Atlanta Multifamily Report for Q2 2020, leasing activity showed 1,861 newly absorbed units in the area despite the stay-at-home order. Due to this, several clients have seen a strong increase in their year-over-year leasing activity.

Likewise, given that owners have not seen any significant reduction in rent collections, they have yet to reduce their pricing on sales. However, operators mitigated average effective rents by 1.5% quarter-over-quarter to $1,222 per month to help new renters affected by the COVID-19 pandemic. While there is still a gap between buyers and sellers, the gap is narrowing. 

Moreover, owners have their eyes on what will happen with the continuation of economic stimulus, which could impact collections over the next couple of months. Furthermore, the upcoming election may also fuel some uncertainty.

Refinancing and Acquisitions on the Rise

Refinancing business in the Southeast has been robust. Rates are at all-time lows and clients can lock in long-term rates below 3%. Acquisitions are starting to gain momentum again as equity is coming back into the market. The pandemic slowed acquisition deal flow significantly as equity went to the sidelines and the impact on rent collections was unclear. Now that the last few months of operations have showed stable collections, equity investors are starting to come back to the table.

However, even with that, most buyers and investors are picking their spots and being very cautious in their investing approach. Many investors are realizing that there is not going to be any material price reductions related to COVID-19 and there is still a housing shortage—especially affordable housing properties. As a result, this has made it very difficult to project rent growth for the foreseeable future.

Given the severe market disruption caused by the pandemic, some advice I have shared with clients is to zoom out instead of zoom in, as the current state of the market appears to only be for the short-term relative to previous downturns. Though the market conditions are extremely difficult for the moment, I am optimistic that there will be a strong upswing once COVID-19 is under control.

Adapting to a Remote World

Undoubtedly, as an effect of the COVID-19 pandemic, face-to-face interactions have been altered. Our industry has pivoted to remote working and increased reliance on technology. As such, Berkadia’s Powerhouse Poll found that investment sales brokers and mortgage bankers expect that even after the pandemic, virtual inspections and tours, remote working, and smaller conferences will become more frequent. Furthermore, 92% of respondents agreed that when COVID-19 and social distancing is behind us, the commercial real estate industry will continue to advise clients remotely.

Now more than ever, it has been extremely important to me to touch base with my clients, calling them on a biweekly basis in order to hear their concerns and share market updates. Additionally, maintaining good communication with my team has been vital during remote working conditions. Daily team calls have served to keep us connected even though we aren’t physically interacting on a daily basis. Technology has certainly served us well.

However, while some parts of our industry can progress with remote working, office properties will continue to suffer immensely if employees don’t return to their spaces. This causes a trickledown effect that could result in increased vacancy rates and lost income which will adversely impact owners’ ability to service their debt, ultimately leading to loan losses for lenders. Increased loan losses could then potentially limit liquidity from banks and lenders, which would cause issues in the CRE industry overall.

Looking Ahead for Commercial Real Estate in the Southeast

As quickly as our world changed, we can also hope that it will reverse in a similar fashion. While we don’t know what will come next, staying optimistic through the uncertainty will guide us through to the other side.

-John Bray, Senior Managing Director