Real Estate Principals Virtual Roundtable: Doing Business in the Current Environment

At the May 8 Bay Area Real Estate Principals Virtual Roundtable, moderated by EisnerAmper Director Michael Morris, a group of real estate leaders shared their insights based upon doing business in this unprecedented environment. The impact of COVID-19 on the real estate industry appears to vary by sector, and there are some surprising findings.

Residential/Multifamily:

• The impact of the pandemic on the residential sector is not as bad as originally expected. There hasn’t yet been a significant increase in rent delinquencies or property vacancies, but as layoffs at big tech companies increase and wages compress, the residential market is expected to see a greater impact later in the fall or early winter of this year.
• The pandemic may change people’s ideas about where they would like to live, as areas with less density of population become more desirable.
• San Francisco’s rental market is getting hit harder than surrounding cities/counties as the city experiences a higher percentage of job losses.
• The MLS inventory list of houses for sale has significantly shrunk as it is difficult to show or see properties when people are sheltering in place. With low inventory, pricing has remained steady.
• Some property owners are now offering virtual tours, and are pleased with the transition. In fact, one landlord said that the ratio of viewing/leasing a property is up 20% with virtual tours compared to live tours.
• Larger units with 3-4 bedrooms are leasing well, but smaller units and studios are experiencing an uptick in vacancies.
• Rent collection only dropped a few percentage points in April 2020, and some owners even experienced improvement over the prior year period.

Commercial and Industrial:

• There are some remarkable buys in the traditional brick and mortar retail sectors at this time—specifically well located assets with some structural issues.
• Some expect it will take at least six-nine months before people become comfortable with frequenting brick and mortar stores or patronizing bars and restaurants.
• There’s an increase in the demand for necessity retail such as grocery, drug stores, and fast food.
• As organizations/employees get used to remote working arrangements, office leasing may see some disruption.
• Landlords are working closely with tenants to help them find solutions, such as applying for SBA loans and working out revised rent agreements.
• Rent collection is close to 90% for some participants, as they see a positive impact from the SBA Payroll Protection Program (PPP).
• Investors may be looking for bargain deals, but they are largely hard to find. For example, industrial isn’t seeing any big haircuts in terms of sales prices right now. Cap rate is not going up, but is expected to experience some upward pressure. Some investors have been approached again for deals which previously fell through.
• The large volume of current layoffs has helped some developers find the talent they’ve been looking for.

There are concerns over the recession and the uncertain future about the U.S.-China relationship and its impact on U.S. economy, but there is also optimism that disruption creates opportunity for people who are innovative and adaptive.