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Coronavirus & The Commercial Real Estate Industry: What You Need To Know
The COVID-19 Coronavirus has had a massive impact on commercial real estate, with both property values and the treasury rate tanking. For certain investors, it could be a good time to take action.
Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!Commercial Real Estate Values Drop 24%, While Fed Rate Drops to Near Zero
The COVID-19 Coronavirus has had a massive impact on nearly every sector of the U.S. economy, and commercial real estate is no exception. According to a report by Green Street Advisors, which analyzed the performance of a variety of U.S. REITs (real estate investment trusts), commercial real estate values have dropped an average of 24% across the U.S., with senior housing prices dropping around 49%, hotel prices dropping 36%, and student housing prices dropping 30%.
At Janover Inc., we are neither doctors nor economists (and cannot reliably predict the future) but we can say that this could be quite an attractive time for cash-rich investors to purchase commercial real estate. This is partially due to the drop in prices and partially due to the substantial drop in interest rates. For one, 10-year treasury yields are incredibly low, and the Fed cut its benchmark interest rate to nearly 0%, while in many cases CRE debt is priced at even less than it was just a few weeks ago.
Of course, purchasing and financing any asset isn’t without risk, particularly at such a volatile point in the market. Depending on how the market plays out, commercial real estate values may fall even more in the coming weeks. However, lenders (which are still actively doing business at the moment) may be spooked if values fall much further.
For all types of commercial properties, a certain number of tenants are likely to fall behind on their rent during this period, making it difficult for borrowers to pay their monthly mortgage payments. This is particularly a concern for retail borrowers, as restaurants, stores and businesses in many major cities have been required to close. This is an even greater concern for asset classes that have already been struggling in recent years, such as B and C-class malls, many of which already face occupancy issues. In addition, with corporate work-from-home measures becoming more commonplace every day, both borrowers and lenders may be concerned about both the short and long-term viability of office properties.
And, while treasury yields are incredibly low, this doesn’t exactly mean that it’s a free-for-all for borrowers. Fannie Mae® and Freddie Mac® Multifamily recently increased floors and spreads, while banks and other private lenders may be decreasing leverage allowances due to market volatility. For instance, a bank offering a 70% LTV loan just a few weeks ago may now only be comfortable offering 55%.
We're living through a period of uncertainty, but here are a few things we can rely on. Markets are cyclical, and things will get better-- we just don’t know how and when (yet). At Janover Inc. our advice is to stay safe, wash your hands, and follow all government health protocols. If you’re interested in purchasing or refinancing commercial real estate, read up and stay informed. And if you have any questions or concerns, please feel free to email our CEO, Blake Janover, at blake@janover.ventures.
Related Questions
What are the potential impacts of the coronavirus on the commercial real estate industry?
The COVID-19 Coronavirus has had a massive impact on nearly every sector of the U.S. economy, and commercial real estate is no exception. According to a report by Green Street Advisors, which analyzed the performance of a variety of U.S. REITs (real estate investment trusts), commercial real estate values have dropped an average of 24% across the U.S., with senior housing prices dropping around 49%, hotel prices dropping 36%, and student housing prices dropping 30%.
At the same time, the Fed cut its benchmark interest rate to nearly 0%, while in many cases CRE debt is priced at even less than it was just a few weeks ago.
However, purchasing and financing any asset isn’t without risk, particularly at such a volatile point in the market. Depending on how the market plays out, commercial real estate values may fall even more in the coming weeks. Additionally, a certain number of tenants are likely to fall behind on their rent during this period, making it difficult for borrowers to pay their monthly mortgage payments. This is particularly a concern for retail borrowers, as restaurants, stores and businesses in many major cities have been required to close. This is an even greater concern for asset classes that have already been struggling in recent years, such as B and C-class malls, many of which already face occupancy issues. In addition, with corporate work-from-home measures becoming more commonplace every day, both borrowers and lenders may be concerned about both the short and long-term viability of office properties.
How can commercial real estate owners and investors prepare for the potential impacts of the coronavirus?
Commercial real estate owners and investors can prepare for the potential impacts of the coronavirus by managing their expenses carefully, taking a close look at their operating expenses and seeing if there are any areas where they can cut back without compromising their business. This will help ensure that their business is better positioned to weather any economic storms that may come their way. Additionally, they should consider taking advantage of the current low interest rates and the drop in commercial real estate values to purchase commercial real estate. According to a report by Green Street Advisors, which analyzed the performance of a variety of U.S. REITs (real estate investment trusts), commercial real estate values have dropped an average of 24% across the U.S., with senior housing prices dropping around 49%, hotel prices dropping 36%, and student housing prices dropping 30%. The Fed has also cut its benchmark interest rate to nearly 0%, while in many cases CRE debt is priced at even less than it was just a few weeks ago.
However, it is important to note that purchasing and financing any asset isn’t without risk, particularly at such a volatile point in the market. Depending on how the market plays out, commercial real estate values may fall even more in the coming weeks. Additionally, a certain number of tenants are likely to fall behind on their rent during this period, making it difficult for borrowers to pay their monthly mortgage payments. This is particularly a concern for retail borrowers, as restaurants, stores and businesses in many major cities have been required to close.
What are the best strategies for mitigating the risks associated with the coronavirus for commercial real estate?
The best strategies for mitigating the risks associated with the coronavirus for commercial real estate include diversifying property types, considering alternative investments, reviewing debt structure, and increasing cash reserves.
Diversifying property types can help spread out risk and reduce the impact of any downturn in one particular sector. For example, if you have investments in both retail and office properties, you may be able to weather a downturn in one sector better than if you had all of your investments in one sector.
Alternative investments, such as private equity, can also help spread out risk and provide a more stable return. Additionally, reviewing your debt structure can help you identify any potential risks and make sure you are in a good position to weather any downturns. Finally, increasing your cash reserves can help you stay afloat during any downturns and provide you with the flexibility to take advantage of any opportunities that may arise.
For more information, please see the following sources:
What are the most important considerations for commercial real estate owners and investors during the coronavirus pandemic?
The most important considerations for commercial real estate owners and investors during the coronavirus pandemic are to focus on key fundamentals, such as location, size, and tenant mix, and to take a long-term view of investments. It is important to not sacrifice long-term stability for short-term gains, and to structure deals in a way that makes sense from a risk/reward standpoint. Additionally, it is important to be aware of the drop in commercial real estate values, as well as the substantial drop in interest rates. According to a report by Green Street Advisors, which analyzed the performance of a variety of U.S. REITs (real estate investment trusts), commercial real estate values have dropped an average of 24% across the U.S., with senior housing prices dropping around 49%, hotel prices dropping 36%, and student housing prices dropping 30%. The Fed has also cut its benchmark interest rate to nearly 0%, while in many cases CRE debt is priced at even less than it was just a few weeks ago. Finally, it is important to be aware of the potential for tenants to fall behind on their rent, and the potential for office properties to become less viable due to corporate work-from-home measures.
What are the potential long-term effects of the coronavirus on the commercial real estate industry?
The COVID-19 Coronavirus has had a massive impact on nearly every sector of the U.S. economy, and commercial real estate is no exception. According to a report by Green Street Advisors, which analyzed the performance of a variety of U.S. REITs (real estate investment trusts), commercial real estate values have dropped an average of 24% across the U.S., with senior housing prices dropping around 49%, hotel prices dropping 36%, and student housing prices dropping 30%.
The long-term effects of the coronavirus on the commercial real estate industry are still uncertain. Depending on how the market plays out, commercial real estate values may fall even more in the coming weeks. However, lenders (which are still actively doing business at the moment) may be spooked if values fall much further. For all types of commercial properties, a certain number of tenants are likely to fall behind on their rent during this period, making it difficult for borrowers to pay their monthly mortgage payments. This is particularly a concern for retail borrowers, as restaurants, stores and businesses in many major cities have been required to close. This is an even greater concern for asset classes that have already been struggling in recent years, such as B and C-class malls, many of which already face occupancy issues. In addition, with corporate work-from-home measures becoming more commonplace every day, both borrowers and lenders may be concerned about both the short and long-term viability of office properties.