March 19, 2020
The markets are roiling “in the now” amid the COVID-19 pandemic, but investors are also looking to the long-term outcomes across a variety of issues and asset classes for what will be the other side to this disruption. For that perspective in this early moment of a crisis that will be changing in detail through the coming weeks and months, Connect Media looked to a special report from Marcus & Millichap and called on Research Director John Chang for some guidance on key issues and considerations. Here’s his response:
Q: There has been a deluge of news regarding impacts to the industries and populations that occupy real estate, as the world reacts to the reality and mitigation requirements of COVID-19. What should real estate investors be currently focusing on in terms of short-term disruption vs. long-term outcomes?
A: There’s a lot of moving parts that investors need to consider. A wide range of public policies at the federal, state and local level are being enacted, while market forces and consumers respond to uncertainty and fear. The longer term outlook is the most positive, as underlying demographics and the potential of a post-corona revival offer prospects of renewed expansion. For real estate investors, the long-term should drive strategic decisions. Over the short-term, investors can expect volatility, reduced consumption and a significant setback in the employment market. The impact could range from relatively mild to severe depending on the property type and location. Key short-term drivers to monitor include consumer and small business sentiment as well as the overall health of the employment market.
Q: Are there specific asset classes that are better positioned to weather the current unforeseen market disruptions better than others? If so, which are they, and why?
A: Apartment properties and corporate-backed single-tenant net-leased assets are the best positioned to withstand the headwinds, at least over a relatively short horizon of six months. However, there are a lot of moving parts at this time that could substantively impact the outlook. Although there are some notable exceptions, assuming the U.S. sidesteps a worst-case scenario, most real estate properties should be able to sustain moderate yield stability, especially given the very low cost of capital currently available.
Q: Are there any compelling considerations for commercial real estate investors reviewing strategies right now in terms of acquisition, refinance or development projects that should be prioritized immediately, in the near term, and for the long haul?
A: Right now is an opportune time to finance or refinance properties. Record low interest rates offer investors an opportunity to lock-in stronger levered yields that will also provide a cushion against downside risk. Investors should quickly prune any assets that they do not intend to hold through the next cycle. The low interest rates have sustained buyer activity levels, but this could quickly change as new factors come into play. Finally, as with any period of increased uncertainty, investors should ensure that their liquid reserve funds are sufficient to cover elevated downside risk should unanticipated setbacks arise.
For comments, questions or concerns, please contact Chris Egger