At the end of April, local real estate giant Houlihan Lawrence released its First Quarter 2020 commercial market report, the first major attempt to gauge how various real estate holdings throughout Westchester County may fair in a post-pandemic economy.
We’re breaking down the markets from least to most volatile, along with what property owners can do to help mitigate risks.
Class ‘A’ office buildings, i.e. those leased to “well-established” companies like law firms, accountants, and larger national and multinational corporations, are in a relatively good place from which to weather the storm.
“While they will not be immune to the crisis and could see some tenants reducing space or even moving to more affordable premises,” says report author and real estate salesperson Teresa Marziano, “Class A operations are less likely to be forced into prolonged rent abatement or worse situations.”
In comparison, Class B and C offices tend to lease to companies in the service industry and other small businesses, which typically have smaller cash reserves, tighter margins, and are more likely to occupy spaces in need of renovation before being rented to new tenants.
Industrial assets — warehouses and the like — should also likely see very little disruption compared to other real estate assets. Based on West Coast estimates where trade was most hindered, only about 5% of industrial tenants had requested any form of rent relief.
In addition to Class B and C office buildings, commercial retail space and lodging assets are set to be the hardest hit by the COVID-19 crisis. Comprising the bulk of malls, shopping centers, and other commercial use spaces, restaurants, fitness centers, “soft goods” sellers like Gap and Macy’s and other retail brands were some of the first to close as the pandemic spread through the North American coasts.
Accordingly, these spaces have the most troubled outlook as the economic shutdown persists. Simon Property Group, owners of The Westchester mall, have reportedly already furloughed 30% of its workforce and laid off an unknown number more. Houlihan Lawrence says the survival and long-term viability of these companies will depend greatly on “creative” solutions by both themselves and landlords.
Multi-family living units are a bit of a mixed bag. Incredibly popular both to Westchester locals and city workers fleeing the higher rents of Manhattan for the Westchester suburbs, demand in multi-family housing has remained high in Westchester, keeping rents up and allowing for the construction of more new and amenity-laden projects.
“In the near-term, Westchester multifamily owners are likely to see a combination of rent concession requests, missed payments, higher vacancies and a readjustment in rents,” the report says. As such, lease rates are likely to fall a bit until the economy returns in full force.
If the ongoing crisis lasts longer, it is also a possibility that the number of new households will decrease, in part as younger residents move back in with parents and form multigenerational living situations. If this happens, new projects that were previously hot-ticket locations might find they have trouble with their occupancy rates.
If the crisis does not drag out, the strong principles from the start of Q1 should result in a “contained” economic stressors and ultimately a rebound to pre-pandemic levels.
Investment properties are another area the lacks assurances. Financing new purchases is likely to become more difficult for investors, though seller expectations are not expected to adapt at the same rate. “Cash flows can become unreliable, driving valuation uncertainty,” the report adds. “During periods of upheaval such as this, investors will want to obtain some reaffirmation of valuation (post-COVID-19).”
Investors should also take note: Houlihan Lawrence expects market cap rates to expand modestly in both industrial and multifamily areas, and more aggressively in office and retail markets.
Houlihan Lawrence says the best approach is to proactively work with tenants, encouraging them to apply for CARES Act benefits and maintain open dialogue, going so far as to cite Manhattan’s Columbia University as an example of an organization waiving April and May rents for its most vulnerable tenants. Good tenants, the realtor recommends, should be treated as an investment.
Landlords should also reach out to their own bankers about what type of deferments and concessions they can take advantage of to secure their own working finances.