COVID-19 Will Accelerate Property Repurposing

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In many ways, COVID-19 is accelerating transitions that had already been occurring in the commercial real estate world.

“People think we should open up the economy sooner,” says Newmeyer Dillion partner Mike Krueger. “But I don’t think anybody’s saying that this isn’t going away anytime soon.”

Ultimately, Krueger predicts that COVID-19 will force “some very creative repurposing of properties.”

“We’re going to see very creative developers come in and repurpose those properties for their next use,” Krueger says. “At this stage, we don’t even know what the best use of some properties will be.”

Krueger says that is already happening in malls. In some places, they’re being repurposed by medical organizations.

“You may have a J.C. Penney’s in a huge building that could be perfect for an oncology department or maybe perfect for outpatient medical treatment,” Krueger says. “The rest of the stores might still be vacant, but that one building is great for that a medical use.”

Malls may have other advantages for conversion to other uses. For instance, a large mall will be ADA compliant.

“It’s going to have elevators and escalators,” Krueger says “Maybe an abandoned mall is a perfect opportunity to put a nursing home or some assisted living facility because you already have all these access points.”

Malls, which are also near public transit and bus lines, would also provide plenty of space to create completely independent units that are not on central air, if ventilation is a concern, according to Krueger.

“I think we’re still waiting on a lot of guidance,” Krueger says. “The insurance companies are really going to be the ones that are going to dictate this.”

But malls are just one example of how COVID-19 could change spaces.

“We are now looking at a complete revolution in what retail and commercial spaces are going to look like, especially in the restaurant industry,” Krueger says. “Depending on where you are, you’re going to have different counties with different restrictions. At least in the Bay area, we know that the post-COVID-19 restaurant experience is not going to be the same as pre-COVID-19, namely and the occupancy space.”

Offices are another place ripe for change. While teleworking had been growing steadily as a trend for a while, Newmeyer Dillion partner Mike Krueger thinks the news that Twitter is allowing its employees to work remotely indefinitely will spark discussions at a lot of large firms in The Bay Area.

“For large tech companies that are renting out giant spaces in downtown San Francisco or anywhere in the Bay area, anywhere where commercial real estate is very expensive,” Krueger says. “Now, all of a sudden, you see some of the most visible tech companies out there saying, ‘We don’t even need our commercial space.’ I think you’re going to see a significant change around what that space is going to be useful and how that space is being used.”

 

Source: GlobeSt.

Medical Office Rents Weather The COVID-19 Storm

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The medical office sector hasn’t been immune from issues caused by COVID-19.

But Kyle O’Connor, president and founder of MLL Capital, would still rather be in that commercial real estate asset class than any other part right now.

“The medical health care sector and the life science sector seems to be holding up a bit better than some other property types. Certainly, hotels or retail are having a different experience. For us, it’s one of the reasons why we liked the sector and continue to like it a lot. We viewed the asset class as having a number of supportive features associated with it.”

Still, O’Connor says there are issues in the medical sector.

“A lot of people are very concerned that the risk of catching something in the doctor’s office might be greater than whatever the issue in the house. Over time, I think the expectation is that it will dissipate, and the need for those basic health care services will resume.”

In April, MLL, which has 15 buildings in the medical and life sciences sector, collected 97% of rents. In May, the company collected more than 97%. And, as things open up in June, O’Connor sees things improving further. America’s vast, aging baby boomer demographic is one reason that O’Connor likes the medical segment, but it’s not the only reason.

“We find that a lot of the practices are in relatively healthy condition. Their leverage levels tend to be lower in many cases. It is a business that does not have a lot of high highs or low lows.”

In a market where there’s still a lot of capital, and other sectors of CRE are floundering, O’Connor expects more interest in medical office properties. But interested buyers will run into roadblocks.

“Because of the specialty nature of the property types and the things that you learn by being in the space for a bit, I’m not concerned. It is a type of property where it’s very beneficial to have experience and knowledge. We don’t think it’s one that, you know, capital readily flows into. But investors are still taking a wait-and-see approach for the time being. For a small asset class like medical is, it’s too early to make any real prognostications. We do think that it is the right time to be in the market and looking for investment opportunities, which we’re trying to put a lot of energy into doing right now.”

Right now, O’Connor doesn’t see large loads of capital focused on the space.

“They may have some other opportunities that are distracting them or maybe presenting themselves.”

Right now, O’Connor sees that capital focused on other targets.

“I think if you’re an opportunistic fund, you’re probably spending a lot more time looking at the hotel sector, than you would be the medical sector. There’s probably distress pricing happening there. I’m sure some hotels are in default. Whereas, most medical office buildings have had a performing loan in March or probably still going to have a performing loan in the future.”

 

Source: GlobeSt.

As They Scour Acquisition Opportunities, Which Assets Are High-Net-Worth Investors Favoring?

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As high-net-worth individuals (HNWI) and family offices survey the commercial real estate landscape, they’re seeing some peaks and some craters.

They assuredly lacked a roadmap for navigating a landscape marred by the coronavirus pandemic, though. However, HNWI and family offices are finding their way through this uncharted territory. And their compasses are pointing them toward commercial real estate investments that they believe are positioned for long-term growth.

In this climate, investors and advisers say, HNWI and family offices are steering toward acquisitions of medical assets, warehouses and multifamily properties.

“With real estate, my clients are willing to settle for lower short-term returns for stability. And the quality cash flow from real estate opportunities is attractive as a long-term investment for them,” says Mark Germain, managing director of Mercer Advisors Inc., a wealth management firm in Denver.

“In pursuit of stability and cash flow amid the current economic environment, HNWI and family offices are looking at recession-resistant asset classes,” says Charles “Chick” Atkins, principal of Atkins Cos., a real estate developer, investor and manager based in West Orange, N.J.

Atkins points to the medical office sector as a standout in this regard, thanks in part due to pandemic-spurred demand for health care services. This trend includes stand-alone offices, retail spaces, medical clinics and urgent care facilities, according to Atkins and others.

“Health care is essential, and people will still need to see doctors and other health care professionals no matter the economic conditions,” Atkins says. “While the use of telemedicine is on the rise, the aging population of baby boomers, coupled with the short supply of well-located, class-A medical offices, should help ensure a continued need for health care properties.”

Germain cites the warehouse sector as another one that’s attracting attention from HNWI and family offices. This includes supply chain warehouses (think Amazon) and refrigerated warehouses. In surveys by NAIOP, a commercial real estate group, 62.6 percent of commercial real estate and banking professionals reported acquisitions of industrial buildings in May, up from 57.3 percent in April.

During a May 28 call, Spencer Levy, chairman of Americas research at commercial real estate services company CBRE said “Although rental and vacancy rates for industrial properties will soften over the next year, the pandemic-fueled jump in e-commerce, the reshoring of manufacturing and the climb in business inventories bode well for long-term industrial demand.”

CBRE says a 5.0 percent increase in business inventories calls for an additional 400 million to 500 million sq. ft. of warehouse space.

“Industrial is not only going to perform better than any other asset class with the exception of multifamily, [but] we are actually more optimistic about industrial today than we were three months ago pre-COVID,” Levy said during the call.

Another sector drawing interest from HNWI and family offices is multifamily. NAIOP’s surveys indicate an uptick in multifamily acquisitions from April to May. CBRE data shows multifamily acquisitions totaled $38 billion in the first quarter, a year-over-year decline of just 1 percent.

In a June 1 report, CBRE said pandemic lockdowns and economic uncertainty lowered the multifamily turnover rate—the share of rented units not released each year—from 47.5 percent in 2019 to 42.1 percent in April. That’s the lowest turnover rate in over 20 years, according to the firm. This low turnover “is helping owners maintain occupancy and cash flows,” the report states.

An example of continuing faith in the multifamily sector: Greensboro, N.C.-based Bell Partners Inc., an apartment investor and manager, announced on June 3 that it had closed an apartment investment fund totaling $950 million. The fundraising goal was $800 million. The fund’s investors include accredited HNWIs.

The value-add Bell Apartment Fund VII empowers the company to spend more than $2.5 billion on apartments in its 14 target markets. The fund has already purchased three properties. Bell Partners has about 60,000 units under management.

“The fact that we were able to close Bell Apartment Fund VII above our target, despite the volatility caused by COVID-19, is a strong vote of confidence from our investors,” Jon Bell, CEO of Bell Partners, said in a news release.

Aside from industrial and multifamily properties, Cassidy senses an interest among HNWI and family offices in downtown office buildings in emerging markets.

“Whether they are core or value-add plays for investors, these spaces will be key components of these cities’ economic engines moving forward,” Cassidy says.

NAIOP’s surveys signal a dip in office acquisitions from April to May, primarily due to uncertainty over how the explosion in remote work will affect office demand.

Even though more employers are likely to switch fully or partly to remote work, MetLife Investment Management predicts the amount of occupied offices in the U.S. will reach 8.1 billion sq. ft. by 2030. That would represent an average annual growth rate of 1.4 percent from the 7.1 billion sq. ft. that’s occupied today. The historic average growth rate is 1.5 percent, MetLife noted in a May 14 report.

MetLife expects remote working trends arising from the pandemic will have “a relatively limited impact” on long-term demand for office space.

“Any stigma or fear that COVID-19 creates related to the office sector, especially as a growing number of firms announce real estate cost savings plans, could create investment opportunities,” MetLife says.

“HNWI and family offices also are watching hard-hit sectors like retail for potential bargains,” said Michael Finan, managing director of Chicago-based BMO Family Office LLC. “We are in a stressed period for real estate, but not distressed. There are many buyers on the sidelines with capital available, and new distressed property funds are being formed each day in anticipation of fire sale deals in the not-too-distant future. While distressed retail properties will certainly satisfy some investors’ appetite for deals, HNWI and family offices are also eyeing single-tenant net lease properties as sources of stable income. We recognize that brick-and-mortar retail is challenged, but not all consumers are satisfied with Amazon or Walmart.com.”

 

Source: NREI