It is no surprise that the Covid pandemic has created major disruptions worldwide, forcing local and global economies into recession. Every industry has been affected to an extent, but it seems commercial real estate has felt the effects disproportionately. Many classes of commercial real estate are repricing due to declining revenues, which has created an unprecedented array of real estate investment opportunities. Opportunistic investors are entering the market to take advantage of significant future upside as economies across the world rebound.
Cushman Wakefield published an article by their Singapore team called “Real Estate Opportunities in Post Covid-19 Recession” which was particularly interesting to us. Regardless of geography, the similarities in distress, repricing, sector fundamentals, and opportunities are nearly identical to what we are experiencing here in the U.S. Plus, they answer questions that most seek to understand during periods of distress such as timing, which asset class has the best opportunity for upside and where to look.
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Cushman states, “COVID-19 and government-imposed lockdowns are going to have a more broad-based and severe economic impact than past recessions we have ever experienced.” Given the uncertainty of the pandemic’s duration and the effectiveness of a vaccine, people and businesses are reluctant to do just about anything. Commercial real estate is feeling the effects daily and it seems to be compounding certain sector’s distress more than others which is why we are seeing significant price moderation.
Cushman states that the most prevalent opportunities exist within the hospitality and retail sectors as investors seek to divest assets constrained by cash flow. Private equity funds are also contributing to the supply as many have reached full-cycle and required to return investor capital. These sellers and sectors represent the greatest potential for well-capitalized investors seeking material repricing in the immediate near-term.
Hospitality makes the most sense when it comes to opportunity.
Hotel properties operate on the shortest lease duration and experience declining fundamentals first. With travel and leisure industries all but coming to a standstill, hotels have recorded the single largest decline in fundamentals ever recorded. As corporations and consumers remain reluctant to travel, hotels will likely experience the greatest price moderation in the immediate future than other asset classes. Opportunities in hospitality will remain high as “pre-pandemic euphoria in the hospitality sector led to a substantial increase in the hotel supply pipeline when demand has significantly weakened.” This supply will most likely comprise of a significant number of overleveraged owners, as well as new developments funded prior to the downturn given the strength of the hospitality sector.
Retail has been struggling for years but the pandemic has accelerated what many are calling the collapse of the brick and mortar retail shopping centers. This is debated though given the resurgence in demand as well-managed shopping malls successfully repositioned themselves with experiential retail concepts that captured more retail traffic pre-downturn. Cushman believes retail properties present investors with a moderately strong opportunity as they believe crowds will return once the crisis passes. In the meantime, as the impact of strict social distancing requirements and occupancy levels continue, retail landlords might seek options to divest which will cause the supply of retail assets to rise significantly.
Universal fundamentals are driving re-pricing.
Although the primary focus of Cushman’s article relates to assets in Singapore, the fundamentals of travel and consumer spending are universal. The similarities in distress and repricing globally are strikingly similar to what we are experiencing here in the U.S.
- Like Singapore, the hospitality and retail sectors are the most negatively impacted here and will stand to have further re-pricing potential should there be a resurgence in coronavirus cases with new lockdown orders issued.
- The office sector, on the other hand, was the most sought out asset class prior to the pandemic. This asset class is still up for debate given the new social distancing guidelines and remote working conditions. It’s not likely the demand for office space will decline, nor the demand for in-person interactions. However, it is likely the industry will find new ways to thrive.
Given the potential for a resurgence of the coronavirus this fall, more lockdowns could occur which would only create further distress in these sectors and further the opportunities for investors to purchase re-priced assets in the future.
If you would like to see additional statistics that Cushman Wakefield reported, I would like to invite you to read the full article here:
To learn more, you should contact us to see how we are taking advantage of these real estate investment opportunities by co-investing with the most reputable hospitality investment managers in the industry that have proven track records. To learn more, please use the following links:
- 2-minute video – The worst downturn in the hospitality industry
- Who does PERI invest with?
- Contact us for more information
Jeremy Robinson is the President and co-founder of PERI Capital Group and has more than 12 years in distressed commercial real estate investing.