The U.S is approaching an important crossroads that could define the trajectory of economic recovery and the outlook for commercial and residential real estate.
The initial impact of the health crisis had a significant impact on employment and consumer spending with 22 million jobs lost between March and April, and retail sales collapsing by 16%.
In May, several states allowed retailers, hotels, and restaurants to reopen early, which allowed for a boost in the economy in May and June, representing approximately 7 million jobs and generating a 12% bounce in retail sales. The reopening came with a price, as some of those states saw an increase in Covid-19 cases, causing them to reverse the reopening process. That being said, states like NY, NJ, and CT, to name a few, which took a slower approach in reopening have now begun their Phase II and III openings.
Congress reacted quickly and provided a variety of expanded benefits including stimulus payments and unemployment benefits. In addition, Congress allowed the Federal Reserve to exercise some of its tools by increasing their balance sheet in order to stabilize the credit markets, and provide liquidity to companies who were experiencing difficulty providing them loans.
| Impact in Real Estate |
| If government benefits are not renewed, the impact on commercial real estate property types could be as follows: |
Apartments and Self-Storage:
Can have a direct impact on performance since they are populated by people who earn a living working in retail, hospitality, and restaurants.
| Multifamily:Remains well-positioned; when the economy started to shut down in March due to shelter-in-place orders in many states, the multifamily industry braced for a number of non-payments, a steep drop in demand and increased loan defaults. Four months later, the impact is not as bad as feared. |
| The pandemic has not stopped construction. The 200,000 units delivered during the first half of the year was a record. More than 600,000 units are currently under construction (CoStar Multifamily National Report, August 2020). |
Office market:
Remains relatively resilient, though not immune to the economic downturn; the US shed about 4 million office-using jobs between the 1st and 2nd quarters
according to Oxford Economics. While the future for proposed projects, particularly spec developments, is in question, roughly 160 million square feet of office space, or 2% of total stock, remains under construction, with tech hubs such as Boston, Austin, San Jose, San Francisco and Seattle seeing the most activity (CoStar Office National Report, August 2020).
Retail and Hotels:
Have been hit the hardest. Hotel occupancies have rebounded but another shutdown or expiration of benefits would hamper the recovery.
Leasing activity remains a shadow, or just half of pre- pandemic trends, and negative net absorption continues to mount, as retailers and restaurants shudder their doors amid unprecedented financial stress.
Construction starts have dropped to historically low levels, and the pipeline of under construction stock remains measured, yet dispersion exists across markets. Fast-growing southern markets such as Miami, Austin, and Nashville are facing more active supply environments, with more than 1% of existing inventory currently under construction (CoStar Retail National Report, August 2020).
Industrial:
Most national industrial metrics are still registering improvement or stable as the economy continues to reopen, including consumer spending and the flow of domestic and
| international goods. However, following a sharper immediate bounce-back, the recovery is now taking a more gradual trajectory. Leasing activity improved throughout the quarter, led primarily by commitments from Amazon, power-grocers Walmart and Target, but also smaller healthcare and medical-oriented supply firms. |
| The Financial System |
| The post 2008-2009 crisis regulatory framework has led to substantial increases in capital held by large banks, in addition to more liquid assets and more stable sources of funding. Not only are banks relatively stable, but they are also serving as the primary transmission mechanism for much of the business support components of many of the fiscal packages available to businesses. Investors and policymakers agree that a key difference between the Great Financial Crisis and this crisis has been the role of the banks. Unlike back in 2008, this crisis is fundamentally a public health emergency that led to an economic downturn as governments have taken measures to stop the spread of the disease. Rather than contributing to the problem, banks are now a major part of the solution, due in large part to the strength of their balance sheets. In addition, homeowners and investors have a good deal of equity built in over the years, making it very difficult to walk away. More importantly, the savings rate has increased, as consumers hold back on discretionary spending and prioritize rent and mortgage payments. Furthermore, the low rate environment has fueled a wave of refinancing in residential and commercial assets improving cash-flow amongst homeowners and investors. |
| Conclusion |
| We remain cautiously optimistic and believe that the real estate markets are in a position to get us out of this recession. The short-term outlook is bumpy, with a lot riding on public policy right now, both at state and federal levels. The key issues will be whether the spread of the virus can be contained and what Congress does with the next round of stimulus. That being said, not every property type will be affected the same way, and some will outperform others. There is a record volume of capital waiting on the sidelines for a wave of distress but so far, very few distressed assets have come to the market. While some investors are waiting for opportunities at lower values, other investors are capitalizing on low interest rates to bolster their leveraged returns. According to Barkadia’s 2020 Mid-Year Powerhouse Poll, conducted in early July with insights from nearly 150 investment sales brokers and mortgage bankers, 55% of the Barkadia professionals agreed that the current market activity is better than expected compared with their initial thought on COVID-19 impact. In addition, 34% said the market is in line with their expectations. Transaction volume has been lower than initial projections for the year, over two-thirds of respondents, 69%, said they expected that capital conditions will return to normal next year. On the residential front, the July «Existing Homes Sales» report jumped by 24.7% between June and July to a seasonally adjusted annual rate of 5.86 million, The National Associations of Realtors reported on August 21st. Not only did the percentage increase, but the sales volume was the highest the U.S. has seen according to Marketwatch. There is no question that record low-interest rates are fueling the much needed demand. Finally, it is important to note that even with the current situation, there are deals getting done and for the most part, financing is available. This was not the case in 2008, as all activity across all sectors collapsed. |
While 2020 has certainly presented its challenges, Linkvest Capital takes pride in sharing several successful and high-profile transactions within its portfolio. Among them are three commercial properties that our firm sold at great returns and originated more than $60 million in business purpose loans.
- Closing of a $2.37 million construction loan for The Azur Resort, an approved 10-acre, 126-unit vacation townhome development located at 7800 Old Lake Wilson Rd. in Davenport, FL.
- Closing of $4.62 million in refinancing for a 1.75-acre residential site at 1515-1543 NW South River Dr. in Miami,FL.
- Sale of a newly renovated single-tenant building occupied by Farm Stores at 1116 Hypoluxo Rd. in Lantana, FL.
- Closing of $4.215 million in refinancing for a 7.7-acre vacant site at 700 West Central Blvd. in Cape Canaveral, FL.
- Sale of commercial building occupied by Farm Stores in Boca Raton, FL.
- Sale of commercial building occupied by Wells Fargo in Peachtree Corners, GA.
- Closing of $8.8 million in refinancing for a 51.3-acre private liberal arts college in Downtown Augusta, GA.
- Closing of $11.5 million in financing to The Estate Companies to acquire a former Ramada hotel in Hialeah.
- Closing of $4.5 million in refinancing for a vacant site at 322 E. Jackson St. in downtown Orlando.
Linkvest Capital remains open to new business opportunities and optimistic about the future.
Wishing you all good health.
Sincerely,
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