Friday, April 24, 2020

What’s Commercial Real Estate Worth Post Covid - and other Assorted Questions

Image Attribution: www.idahoscenicvistas.com
First of all I pray that each of you is maintaining during this period of craziness. This too shall pass and we will be better, stronger and more nimble as a result. As previously mentioned, I have pivoted into a resource and informational clearinghouse for my clients and prospective clients. Consequently I have made a number of phone calls over the past three weeks. After all, our transactional volume has decreased substantially and with an awful lot of time at home - what better time to take advantage of some great connections and conversations.

I thought it would be informative to review a few of the most commonly asked questions I’m asked these days and the ways in which I am responding.

Are there any essential deals? Certainly transactions which are the replacement portion of a relinquished property - the upleg to a 1031 tax deferred exchange - are essential in order to defer capital gains. Late yesterday we learned the IRS extended some deadlines. According to Stephen Decker of IPX 1031 exchange “

Are new deals occurring? New closings, yes. But, generally the origin preceded the current craziness. New listings are appearing on the market. However, most existing contingent escrows and requirements to buy or lease have hit the pause button until we get some clarity.

What do you see after all of this shakes out? As I opined a couple of weeks ago - retail may never recover as we knew it before. Folks will realize they can occupy fewer square feet of office space with greater efficiency. The new trend toward co-working and collaborative work places will be altered because occupants will maintain distancing. Industrial - in many cases essential - will be the big winner in commercial real estate classes. Multi-family has a tsunami of issues with rent control, eviction moratoriums and tenant defaults to overcome.

Is Commercial Real Estate going to get crushed? In the short run - 6-12 months - quite possibly. Expect a bounce back to be steeper than 2010. Aside from retail - our fundamentals pre-Covid - vacancy, absorption, and rent growth were quite strong. If we can return our economy to work soon - the carnage may be largely avoided.

Is now a good time to market my commercial real estate? Unless the sale is forced or a new tenant is sought for a vacant building - I would suggest waiting a few weeks.

What is my building worth these days? No one really knows. Value depends upon the capitalized net income of rents or the utility with which an occupant’s operation relies. In the former - how will rents be impacted and at what return percentage will the market place settle? Pre-Covid found yield requirements in the 4.5-5% range. Now. Anybody’s guess.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.


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