Panelists Doug Bibby, president of the National Multifamily Housing Council (NMHC); Tom Bisacquino, president and CEO of NAIOP Commercial Real Estate Division; Wendy Mann, CEO of CREW Network; and Tom McGee, president and CEO of International Council of Shopping Centers (ICSC) joined moderator Hessam Nadji, president and CEO of Marcus & Millichap, last week for a webinar discussion about the current state of the commercial real industry nationwide. Marcus & Millichap hosted the event.
Nadji commenced the discussion by assuring the audience that the commercial real estate industry, as a whole, is not headed for distressed pricing, a fire sale or basement pricing.
“There are new buyers, new capital sources coming into the marketplace,” Nadji said.
Nadji highlighted the differences between the 2008 and 2009 financial crisis and the current health crisis and why the industry today is in much better shape.
“The nature of the [financial crisis] was essentially a sick financial system that had over-leveraging and over-speculation which brought down the economy. The response to that had no playbook, and it took 13 months to generate the first stimulus package in the form of TARP that was finally injected into the economy and which scaled at about 6% of total GDP,” Nadji said.
Contrast that to the health crisis, which response did have the benefit of some playbook and some experiences learned in 2008 and 2009, particularly from the Federal Reserve.
“And it resulted in a stimulus package equating to over 30% of GDP delivered in seven months,” said Nadji.
Nadji noted that this rapid injection of liquidity into the marketplace has had a profound effect on commercial real estate.
“As we all know, liquidity is everything,” he said.
Nadji noted that the banking system was far more liquid going into the pandemic than in 2008. In addition, he said, corporate profits were significantly higher and near all-time highs, and corporate cash on hand was also at a record level.
“In fact, if you take a look at the pattern and progress since the onset of the health crisis, it does appear that overall, at a macro level, the worst is over,” said Nadji.
Citing a recent survey conducted by Marcus & Millichap which reflected that nearly 70% of real estate investors believe that commercial real estate offers favorable investments as an option today and activity among its clients, Nadji said that lenders are back into the market after pulling out in March and April.
“There is financing available which makes the low interest rates much more powerful for our business,” Nadji said.
Prior to introducing the panelists who represent a broad section of the industry, Nadji noted that the current state of commercial real estate varies depending on the property type.
“We have such a huge difference in performance, operations-wise, pricing-wise, financing-wise, across the spectrum that it is a mistake to generalize any strategy or trend,” said Nadji.
Nadji asked the panelists to discuss how the members of their organizations were getting through the crisis.
Bibby said that when apartment residents started quarantining in place on a 24/7 basis, NMHC members had to mobilize to serve that community 24/7.
“We were already struggling with package delivery before that, but package delivery and food delivery today is just off the charts because everyone is still in place. For our members, it’s been very intense,” Bibby said.
McGee praised ICSC members for the innovation and entrepreneurship they’ve shown in the face of incredible obstacles facing the retail segment.
“I think you see things like curb side pick-up and the utilization of click-and-collect and using stores to really fill that last mile delivery (that) almost happened instantaneously as we entered the crisis,” said McGee.
Although these were trends already underway, they have been accelerated five to ten years during the past six months, according to McGee.
“I think three words I would use to describe what we are seeing among our members are adaptability, flexibility and resilience,” said Mann. CREW Network’s members are in all disciplines and property segments across the commercial real estate industry.
Mann said her members had to adapt to the changing environment very quickly.
“And then we flexed really right to how do we communicate and work together to serve our clients. Our members became advisors. We might not be doing projects or building things but they were helping advise. And then finally on the resilience side, I think we came out of that first three months looking back going okay we’ve got this,” said Mann.
Mann said she thinks CREW Network became more compelling as a business network during the pandemic because its members were staying together, supporting one another and doing whatever business was available.
Bisacquino said that when the pandemic began, commercial real estate was in a fairly healthy position, particularly the office industry. But with people living at and working from home, e-commerce exploded and propelled industrial distribution space to the top of the list.
“We went from just in time to just in case, because people were starting to panic buy. It really was a disruptive technology with regard to the supply chain because all of the sudden the supply chain wasn’t feeding the brick and mortar; the supply chain was feeding e-commerce,” he said.
Three times the space is needed to supply e-commerce than to supply brick and mortar, Bisacquino noted.
“That has become, from our perspective, the good story. If there is a good story in this pandemic (it’s) in that industrial has done exceptionally well, pricing has done well, demand for space has done well, the cost of land has gone through the roof, the availability of land and the pressure to bring that distribution closer and closer to the consumer -the last mile with cold storage- and people are now very comfortable with buying their perishable groceries online,” Bisacquino said.
McGee said ICSC is forecasting a 1.9 percent growth for retail over the holiday season because consumers, who have spent less on such things as entertainment and dining, will spend more for the holidays.
“I think that will be important because that will enable hopefully the retail segment and property owners to be better positioned if that comes to fruition as the pandemic eases hopefully in the first quarter of 2021,” McGee said.
Bibby said that the multifamily market is performing well.
“Many of my members told us that the first half of October is stronger than it was for them last year and stronger than it was in September. I don’t want to say that we’re just sitting fat and happy but certainly we are very pleasantly surprised by the performance of the sector,” said Bibby.
Nadji noted there was a slowdown in apartment transaction activity in March and April because it was hard to get financing.
“But the wheels have started to turn again, and investors are taking advantage of the low interest rates,” Nadji said.
“However, there has been a drop in vacancies and a decline in rental rates in the urban core multifamily properties, particularly the high-rise product, as millennials working from home and not in their downtown offices, leave for the suburbs,” said Bibby.
Bibby believes the suburban flight is short term.
“I think they will come back to the downtown areas, but right now there’s not much to hold them there and the prices are better in the suburbs,” he said.
Mann and Bisacquino agreed that the millennials -and particularly the generation behind them- will return to the urban core once the health crisis has passed because they enjoy being where the activity is.
All of the panelists agreed that urban investments will be a unique window of opportunity for investors in the next 12 to 18 months, although McGee and Bibby said that investors will need to be selective, and Bisacquino cautioned that it may be difficult to find a deal.
The panelists also agreed that a year from now the economy will be growing. Mann and McGee predicted the growth will be less than 3 percent, while Bisacquino and Bibby were more bullish, stating that they saw the economy growing at a rate of 3 percent or more.
Nadji ended the discussion by asking the panelists whether three years from now they would view October 2020 as a unique, once-in-a-lifetime opportunity to invest in commercial real estate. They all answered yes.