Investment Analysis: What are owners doing with commercial assets in today’s challenging landscape?

Real estate investors and owners across the spectrum are still working to fully understand the impact of the COVID-19 pandemic on their assets, tenants and financing structure. While the initial blows of the crisis are in the past, there is still a gradual and uneven recovery process ahead. How many more store closures are on the horizon? Will there be additional tenant bankruptcies? Are there tenants to fill vacant spaces? What will the lending environment look like in the future? When you consider all of the uncertainty, there will undoubtedly be a significant increase in stress to our markets and at our properties.

Investors and property owners are left contemplating what to do with their assets—particularly those in distress. Each sector of commercial real estate is coping with unique challenges. Our Stirling Investment Advisors weigh in on what they see with property owners in the retail, office and multifamily segments across the Gulf South.

Retail

Retail real estate owners have been forced to make difficult decisions as they navigate through these uncertain times while looking to ensure the long-term success of their properties. The retail sector felt the impact of the shut down almost immediately. Essential businesses like grocery stores and pharmacies saw increased sales, while non-essential retailers were forced to close their doors completely. Restaurants were forced to close or operate “to-go” with some only doing 20% of the business they were accustomed to. Consequently, retail property owners were pressured to offer relief in the form of rent abatements and/or deferrals. As a result, those owners then looked to their lenders seeking relief in the form of forbearance.

The forced closure of certain retailers and restaurants led to landlords and tenants working together to help each other succeed. Landlords allowed restaurant operators to put up tents on sidewalks and in parking spaces so that they could serve more customers. Landlords have also had to manage the impact of more tenants offering curbside pickup and how that impacts parking and operation of shopping centers.

Regular monthly rent collections are on the rise and owners are also starting to receive payments from the deferrals granted earlier in the year. Owners are reporting increased traffic and recent reports indicate consumer spending is intact as sales numbers show some signs of life. -Griffin Lennox, Investment Advisor & Analyst, Retail

Office

While the impact and severity of the pandemic on the office market were not as profound as in the retail sector, the office market did not go unscathed. There appear to be some recurring themes among office property owners as they look to preserve their rent roll. Office owners are being creative in their deal-making as they try to attract new tenants and retain existing tenants by being more receptive to shorter-term deals on both renewals and new leases. They are also being more innovative when it comes to capital expenditures and reducing costs. As owners attempt to hold on to capital and build up cash reserves, some are offering to trade rental abatement and/or free rent incentives for tenants to build out space as opposed to providing an improvement allowance.

It is too soon to determine any trends in rental rates resulting from the pandemic, but all indications are rents seem to be flat compared to pre-COVID. Demand for office assets in tertiary markets has increased as activity appears to be trending away from larger urban markets to more suburban markets. This presents the possibility that we will see less demand for the urban, high-rise type office properties. Conversely, owners of garden-style, low-rise office buildings are benefiting from this shift—and we anticipate this will continue. -Steadman Bethea, Investment Advisor, Eastern Region

Multifamily

There is not a “one-size-fits-all” solution on what to do with multifamily assets right now. In this unique real estate environment, multifamily owners are using various strategies specific to their properties, business models and local economies to best position them to outlast COVID-19—and decisions made today are certainly different than decisions made in the early stages of the pandemic. Overall, we have seen owners take a wait-and-see approach to many of their assets. To this point, multifamily has weathered the storm relatively well in rent collections, occupancy and overall operations, in large part due to federal programs that provided relief to owners and economic stimulus packages, which helped keep renters in place.

There has been a general disconnect on price expectations between buyers and sellers, as buyers had expectations of “COVID discounts,” while owners were simply not taking hard enough hits on their bottom line to need to exit their investments at a reduced price. We have seen both price expectations and investment activity trend back towards equilibrium in recent months, which is a good sign. Although multifamily has been the “darling” of commercial real estate through the pandemic, it’s essential to track performance moving forward with the CARES Act expiring and no additional legislation on track to pass, as well as the CDC’s eviction moratorium enacted earlier this month. -Saban Sellers, Investment Advisor, Multifamily

Uncertainty brought on by the COVID-19 pandemic dramatically slowed real estate investment activity; however, recent activity indicates that investor sentiment and transaction movement across property types show signs of recovery.

One silver lining of the pandemic is interest rates have hit historically low levels in recent months. This has led to refinancing existing assets and driven further acquisition activity for well-positioned assets backed by well-capitalized investors.

Whether you’re looking to invest, acquire or dispose of commercial assets in today’s challenging market, our experienced investment advisors have the resources to provide our clients with in-depth market research, knowledge and experience across all property types.

Contact the Stirling Investment Advisors team to see how we can help you.

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