The impact of COVID-19 is indisputably unprecedented. Its widespread impact has affected how we live our daily lives and conduct our business in nearly every industry. We are in a very fluid environment and the long-term impacts of a downturn in the sector are hard to quantify. However, even with a slow-down, we firmly believe that commercial real estate continues to offer attractive relative returns in comparison to other asset classes.
The Trinity Real Estate leadership team has experienced multiple real estate cycles and we are well positioned to assist our clients during this downturn. Our experience has taught us that being proactive with hands-on-asset management and consistent communication with our clients, managers/tenants, and lender partners is more important than ever during this period. Here are some of the actions we are currently doing on behalf of our clients and some thoughts on what we might expect in the coming months.
In the last several weeks we have begun reaching out to our clients to develop a plan of action, which includes some of the following elements.
PACIFIC NORTHWEST REGION
We have and continue to believe that the strength of the economy in the Pacific Northwest (PNW) region supports having investments in commercial real estate. While there is sure to be near-term negative impacts to the market, the reasons the PNW was a strong region before will allow it to comeback better than most. The presence of a strong and well-educated workforce, prominent companies including many headquarter locations for influential firms, a strong University system and a high-quality of life attributes to the region’s strength. The technology industry is standing out as a bright spot in the region’s economy and we believe it will help minimize the impacts of the downturn and allow the region to come back strong quickly.
This crisis has forced many of us to change the way we do business because of the need for social distancing. Currently, in the PNW region, we have not observed a significant pullback in the office market. However, we do believe that the small office space market, which is dominated by small business, is likely to be hit the earliest and hardest. A couple of trends to watch for:
To date, the industrial sector has been the least impacted by the current economic environment. The trends of deglobalization of supply chains and shift to online retail were already evident in the market before the crisis and are now being accelerated. The increased popularity of online shopping will continue to boost demand for logistics spaces. The availability of industrial space in the region was tight before this crisis. We anticipate there will be some impact on the industrial suppliers that serviced the affected brick and mortar retailers and restaurants. However, the industrial sector will continue to be a key area of interest and growth post-crisis.
We are guarded about this asset class in the sector in the near-term given the recent surge in unemployment claims. These initial job losses appear to be occurring with lower earning workers, especially in the hard-hit services sector. Therefore, we are anticipating lower rent properties in secondary locations in the region to be more challenged than those located in urban core areas. With lower demand and a still robust level of apartments under construction, we expect to see increases in rent concessions. While there will be near-term impacts, we still believe that the PNW region will be a strong job generator long-term, which will lead to a strong continued demand for apartments.
RETAIL & HOSPITALITY
Both the Retail and Hospitality sectors are being hit hard in this crisis. The requirement for social distancing and shift to online retail has caused many retailers to close and halt rent payments. We believe that the stronger operators with good balance sheets will survive, but many businesses will be forced to close for good, thus, accelerating a long-term trend. With the travel restrictions the hospitality sector has been devastated especially locations near airports and those primarily serving groups. We expect that there will be a surge in loan workouts in the hospitality sector.
At this time, we are advising our clients to maintain liquidity, defer unnecessary capital improvements, and to focus on collections. We are also advising them that there will be investment opportunities during and after the recovery which should become apparent within the next 6 - 12 months. We strongly believe being proactive will be paramount in this evolving crisis. We can come out of this crisis stronger if we adapt and plan accordingly. We are here to offer our support and experience. If you have any questions regarding the current environment and how it might affect your commercial real estate ownership, buying, selling, or leasing, please feel free to contact us. We value the relationships we have built in our Trinity community. Our thoughts are with every one of you and your families. Stay healthy and safe.
ABOUT THE AUTHOR - PETE STONE
Pete joined Trinity Real Estate in 2010 after 11 years at ING Clarion Partners, where he closed over $2 billion in real estate investments. His expertise in investment, development, asset management, and consulting has consistently helped complex and often challenging projects deliver improved returns for owners. Pete’s experience encompasses all kinds of commercial and multifamily properties, including hospitality, office, multifamily, industrial, and retail. Whether approaching a distressed portfolio or competing for a coveted redevelopment challenge, Pete is skilled at matching opportunities with client goals while aligning the needs of investors with each project’s complex web of stakeholders.
An active member of the Urban Land Institute, Pete is an advisory board member for the Pacific Northwest chapter, as well as an active member of both the Pacific Real Estate Institute and the National Association of Industrial and Office Properties.
ABOUT TRINITY REAL ESTATE
Trinity Real Estate (TRE) provides comprehensive, personalized real estate services and investment strategy to West Coast family offices and institutional investors. TRE’s hands-on, high touch, and full-service approach has led to the management, development, and repositioning of more than $3 billion in assets since its founding in 2001. These assets span all sectors of the real estate market including office, industrial, multifamily, residential, hospitality, and mixed-use. TRE’s objective is to create, enhance, and preserve real estate assets that produce strong long-term returns for its clients.