As of early June 2020, every U.S. state had partially reopened in the wake of the COVID-19 outbreak, enabling more stores, small businesses and offices to return to work. The health crisis and economic uncertainty caused by the global pandemic, however, were far from over. As the nation gradually reopened for business, CBRE’s Richard Barkham spoke with Scotsman Guide about the outlook for the economy and commercial real estate.
Where do we stand in terms of the commercial real estate market?
At the moment, the crisis has not really shown up in real estate data. That’s partly because not much property is trading. Obviously, leasing has dropped right off. Normally, there is quite a close relationship between unemployment and vacancy [rates], but unemployment shot up so quickly that we haven’t seen the impact of that coming through in the property market yet. Asking rents are stagnating rather than falling.
Is the commercial real estate market in a better position than it was prior to the Great Recession?
I think so. Public REITs (real estate investment trusts) dropped about 60% in share prices in the [previous] global financial crisis, and took four or five years to recover. REITs have probably dropped 40% [in this cycle] and they’ve already recovered about 10%. So, you know, the public markets are telling us that things are not quite as bad.
In 2008, it was a genuine end of cycle, where the system had many imbalances within it in terms of leverage, overconsumption and overinvestment that needed to be sorted out. Prior to this crisis, American companies were in very good shape. The government support has also been much better, much stronger and much quicker. So, we may get lucky and this will only last for one quarter. We can’t say yet that it’s better, but there are lots of reasons to think that the U.S. economy can survive a one-quarter hit and bounce back quite quickly.
We will definitely see quite a big drop in transaction levels in 2020. A lot of that downtick will be in the second quarter.
Do you expect banks and other commercial mortgage lenders to pull back?
I can only talk about what my colleagues in the debt industry are telling me, but the debt markets were closed for about a week and then they opened again. I am sure they are not going to be as aggressive as they were, post-COVID. The underwriting will be more conservative. Loan-to-value [ratios] will be down a little bit, but the debt markets are open for business and that is really remarkable given the scale of the crisis.
What about sales of commercial real estate assets?
We will definitely see quite a big drop in transaction levels in 2020. A lot of that downtick will be in the second quarter. We know there are lots of investors out there with cash ready to transact. We’ve noticed that there’s a bit of a gap now between sellers and buyers. Maybe buyers want more of a discount than sellers are willing to give. But, at the moment, transactions are also held up by the lack of ability to travel and do the physical viewings.
What needs to happen to prevent a massive downturn in commercial real estate?
In order for things to bounce back, we need to come out of lockdown. It is not the virus that is hitting the economy, it is the lockdown. People probably realize that if the lockdowns continue, it won’t just be a worse recession — the root society is threatened. The economic devastation will be so great. So, in order to bounce back, we need to come out of lockdown. And I think that is what we will do. ●