Though there has been some relief in the sector from government subsidies around the world, there is still concern, for example in the US. 19% of loans backed by hotel properties were more than 30 days overdue in May - similarly, 10% of retail properties were behind on their payments. As the crisis continues, we expect these figures to increase, leaving many corporations at risk of needed restructuring or distressed debt in the future.
As commercial tenants begin to fall behind on their rent, banks have had an influx of requests from landlords to restructure their original mortgages. Faced with plunging profits and tens of thousands of layoffs, companies are looking to renegotiate their retail or office leases in the hope of lowering their overheads and surviving the current global economic downturn. This has resulted in fierce negotiations with building owners, who fear rising vacancies and a fall in their own revenue. As we learnt from the last financial crisis, widespread restructuring in mortgages could result in loans being written off - a price which will affect banks for years to come.
A similar trend is emerging in the office rental space. The global pandemic and subsequent lockdown in most countries forced a ‘working from home’ adaptation. This has raised bigger questions for businesses around whether, and what sort of, office space will be needed for the future.
There may, therefore, be investment opportunities in alternative office spaces. WeWork, for example, was struggling before the pandemic, but CEO John Arenas has recently shown optimism for the business, predicting an increase in demand where corporates look to spread their workforce. In fact, CoStar’s CEO Andrew Florance, claimed that some businesses predict as much as 200-300 square feet per employee on return, versus the 30 square feet per employee we see in offices today. The figures are already clear – while WeWork’s new inquiries were down by half in February, they have steadily crept up, and 40% of the new requests have been companies looking to adjust post-pandemic.
In the meantime, as people increasingly look to work from home and space is needed for people to socially distance in the short-term, corporates are turning to technology investment over real estate. We believe this is in the hope of business continuity and competitive advantage. This trend is starting to emerge in transactions – for example, CoStars’s recent acquisition of commercial real estate transaction platform Ten-X, a commercial real estate marketplace that allows investors and brokers to buy and sell properties online, for $190 million, proving there are deals to be made in the space. With everyone more reliant than ever on the internet for viewings and enquiries on the real estate space, the opportunity in technology platforms is now more apparent than ever.
No one can say for certain what the fallout from Covid-19 will be on the commercial real estate space but this is a bedrock for commercial life and an area that is paramount importance for the financial system. With countries worldwide slowly beginning to open following lockdown, the commercial real estate market is beginning to pick up and is far from the industry we saw pre-pandemic. For investors and operators in the space, adaption will be key. We anticipate new investment opportunities appearing as demand shifts and the once traditional sector is forced to re-evaluate its need for technology.
 Trepp – ‘Hotel CMBS exposure to Covid-19’ – June 2020 https://info.trepp.com/request-a-free-trial-hotel-cmbs-exposure-covid-19 The Real Deal, ‘CoStar CEO Andy Florance on Buying Ten-X and why brokers don’t need discounts’ – May 2020 https://therealdeal.com/2020/05/18/exclusive-costars-andy-florance-on-buying-ten-x-the-future-of-office-buildings-and-why-brokers-dont-need-discounts/ CNBC – ‘WeWork asks employees to value work versus safety in offering them money to go to the office during health crisis’ – March 2020 https://www.cnbc.com/2020/03/24/wework-paying-people-to-come-to-office-during-crisis-is-moral-question.html Wall Street Journal, ‘CoStar Acquires Ten-X in $190 Million Deal’ – May 2020, https://www.wsj.com/articles/costar-on-verge-of-purchasing-ten-x-in-190-million-deal-11589405076
This article is for informational purposes only and is not, and may not be relied on as, investment advice.