New leases and sales volume have dropped off a cliff as the pandemic clouds a rosy economic outlook.
In the first half of 2020, the total amount of commercial real estate sales in the Portland office market was on target to reach a record $1 billion. Growth in that sector had hit record volumes for the past five years.
All that has come to an abrupt halt as a result of the coronavirus pandemic that has brought unparalleled uncertainty to the the global economic outlook.
Companies’ plans to lease or expand into new office space have paused, and investors are skittish about buying property in these uncertain times.
The sectors that are hardest hit by the slowdown are hospitality, travel and retail. Most businesses in these sectors have had to shut down completely to comply with social-distancing rules.
Revenues in the hotel sector, for example, are projected to fall by an average of 37% nationally in 2020, according to an analysis by CBRE, a commercial real estate group.
Office leasing has slowed down and the outlook for that sector is hard to project, say analysts. “A lot of tenants are in wait-and-see mode,” says Tim Harrison, research manager for JLL, a commercial real estate services firm.
“The situation is changing so fast. Tenants are still coming to terms with how their business is being impacted.”
Tenants that had already toured a building and entered a new lease or who were renewing a lease are still doing so, he says. But companies that had sought to expand into new office space are putting those plans on hold, says Harrison.
What is uncertain for many office tenants is the impact that the closure of retail as well as travel and tourism will have on their own companies. A lot of businesses are losing customers in those sectors. The exception in retail are grocery and pharmacies, which remain open during the pandemic.
One bright spot is that landlords are being more flexible with rental agreements. Landlords and tenants are entering some “creative leasing negotiations” to get through the slowdown, says Harrison.
Some retailers, for example, have asked for their rent payments to be tied to sales revenue for a specific period of time. Some business tenants are deferring rent payments until they can reopen or recover.
Sales of commercial real estate, particularly for large transactions, may take a while to pick up gain. “Investors and buyers and sellers of real estate have hit the pause button,” says Adam Taylor, capital markets director at JLL.
The slowdown in deal flow will be particularly felt in transactions worth more than $10 million. Most buyers of these property deals are large national or regional institutional investors based outside of the state. They can no longer travel to Oregon to tour a building. This has added to the slowdown in deal flow.
The type of real estate buyer of large properties has shifted over the past decade. In 2005, before the global financial crisis of 2008, 65% of Portland’s downtown core buildings were locally owned. Now 65% of those buildings are owned by out-of-town institutional investors, such as pension funds.
Taylor cautions that there are still a small number of buyers “looking for opportunities.”
One of the best-performing sectors in this pandemic is industrial and warehousing. Data centers are also in high demand, particularly because of increased demand for data streaming as workers telecommute.
Warehousing need is high because of the growth in e-commerce. People are ordering more goods online because of stay-at-home recommendations. This means that demand for warehouse facilities that store goods bought online will continue to surge during the pandemic. Food-distribution centers will also be in high demand, adds Taylor.
The industrial real estate sector was a strong performer before the pandemic and will remain so, he says.
Some are optimistic about the commercial real estate sector rebounding after the pandemic ends.
“There are multiple signs that the economy and then commercial real estate will recover quickly once the virus’s spread abates,” said Richard Barkham, CBRE global chief economist and head of Americas research, in a statement.
He added while there may be some commercial mortgage defaults, the Federal Reserve’s has put policies in place to make credit readily available.
“Although the near term looks brutal, the medium-term outlook is more favorable because there are no structural flaws in the macro economy or in commercial real estate,” said Barkham.
The $2 trillion federal stimulus package, as well as state funding assistance, will go some way to helping businesses pay office rents and stay afloat. The big unknown is how long the severe restrictions on economic activity caused by the pandemic will last.
And that is anyone’s guess.