Amid shelter-in-place orders and widespread economic uncertainty, private real estate has yet to see its worst-feared outcomes of the covid-19 pandemic. So far, most rents have been collected on time, tenant defaults have been fewer than expected, investment capital has remained accessible and the earliest hit markets in Asia have already shown signs of recovery.
However, the crisis is only two months old in the US and Europe. And beneath a robust looking veneer of the past month, there are reminders the worst of this downturn is not behind us. Indeed, scratch beneath the surface and normalcy in fact appears further away than the optimists would believe.
PERE has identified five false dawns for private real estate executives to be wary of in these still early days of the covid-19 era:
Just because capital continues to be raised… does not mean the market is ready to receive it.This week saw two notable fundraisings in Europe. BlackRock raised almost €1.5 billion from nearly 40 investors for its fifth value-add European property fund, Europe Property Fund V, 30 percent of which was from investors new to the series. Tristan Capital Partners raised an additional €600 million equity tranche for its semi-open-ended core-plus-value-add fund, Curzon Capital Partners V. Talking of a “time-lag” between the distress in the market and the time to deploy its newly acquired war-chest, Thomas Mueller, portfolio manager of BlackRock’s fund series, said: “buying opportunities await those that can remain patient in the near-term.” A source familiar with Tristan’s raising, meanwhile, predicted that lag would materialize in six-12 months.
Just because commercial properties are starting to re-open… does not mean tenants, landlords or lenders can breathe a sigh of relief. As Alex Price, UK chief executive of Fiera Real Estate told us recently, even with stores reopening, “we’re not going straight back to 100 percent capacity economically.”After all, social distancing measures will remain in force, and that will mean tenants, particularly those in retail, hospitality and leisure, will operate at a reduced capacity. That, along with muted consumer confidence, will translate to lower sales, which means that many tenants will continue to struggle to pay their rent, if they survive at all. Rent collection is therefore likely to remain a concern until a vaccine for covid-19 comes to market, which is not expected for at least a year.
Just because public equities had a banner month… does not mean market fundamentals are strong. After plummeting in March, stock indexes made up much of their lost ground in April. The S&P 500, for example, climbed 13 percent in the month, the sharpest climb in 33 years. Listed data center REITs Equinix and Digital Realty Trust are both up about 39 percent since March 23 and logistics specialist Prologis rallied more than 30 percent. However, office owners Boston Properties and SL Green as well as mall specialist Simon Property Group have stagnated since the market bottomed out, painting a more accurate portrait of market uncertainty. GDP is estimated to have fallen nearly 5 percent in the first quarter, a figure likely to balloon this quarter.
Just because people are buying more goods online… does not make logistics bulletproof. Shelter-in-place orders have forced people to amend their shopping habits, likely accelerating the shift toward e-commerce beyond clothing and household goods to food and other essentials. However, the warehouses that facilitate next-day deliveries will only skirt the hardships faced by other property types so long as consumer demand is supportive. More than 30 million people applied for unemployment in the US alone since the pandemic struck. Millions more will join them and, uncertain of their own job security, they are likely to limit unnecessary spending. One quarter of US households surveyed in a McKinsey & Company global consumer sentiment survey said they planned to limit spending and one-third expected to see their incomes decline in the coming weeks.
Just because stimulus efforts are unprecedented… does not mean they are unlimited. We’ve seen $3 trillion pumped into the US, €2.5 trillion to the European Union. Governments and central banks around the world have committed to shoring up credit markets, safeguarding businesses and putting cash into the hands of workers. But record fiscal aid will still only go so far. In the US, even firms that received forgivable loans for the government, can only use them for three months of rent at most. Given the increasingly hostile debates over additional stimulus packages, landlords should not bank on governments subsidizing their rent rolls beyond the short-term.