The lasting change of COVID-19 on the commercial real estate industry

boston properties Jul 21, 2020

The FED is set to print $3 trillion, the national debt-to-GDP is close to 120%. We’re currently in a recession far worse than the crash of 2007. As one would expect from these numbers, many industries are going to feel the effects of this sudden downturn for quite some time. The real estate industry is an interesting subject in all of this. What does this mean for commercial real estate if businesses can’t get 100% of their workforce to operate? For businesses renting office space can't afford to stay and are finding new offices, will this lead to a rise in supply? What does this mean for real estate investment trusts (REIT) and their commercial office portfolio? What are the incentives, if any, to increase or renegotiation rent prices to hold onto current office space? Why is taking an office tour important?A simple solution?The main issue for employers seeking to have their employees return to the office is social distancing. The very real danger of starting a second wave is fully in the minds of politicians and business owners. Offices with greater human occupancy are going to pose a higher risk thus finding new offices could spread employees out while maintaining productivity. But with better safety measures in place, giving your employees an office tour could abate many fears. Landlords will need to consider competitive pricing of their per square feet offer. In London, commercial real estate deals have dropped by 25%. The cost of servicing office space is already biting into the year-on-year appreciation percentage value. This could give rise to renegotiation rent prices and a shift in commercial office portfolio management. The simple fact of the matter is, employers renting office space can’t fit as many employees as they normally could in the same space. Instead of waiting for them to exit the market, PCM pricing and ensuring improvements in the HVAC system and bathrooms would make life easier. There is no simple solution, but a series of small changes in an effort to retain leaseholders and renters will need to be created.

Where to invest?

Now the time to take an office tour or two if you’re finding new offices to expand into. Brookfield has just announced a $5 billion package to save its retailers. This Canadian investment management group owns many US shopping malls. Rather than wait for the domino effect, Brookfield has chosen to fire a relief package at their leasing and renting clients. This is probably after many office lease negotiations had told them, it was either this or a mass exodus. Shares in Brookfield Property Partners have dropped by 50%. This makes it ideal for investors wishing to increase their shares portfolio and business owners seeking to have a renegotiation rent. But what of its competitors Boston Properties and JBG Smith?A rise in office lease negotiations is from commercial real estate giants like Boston Properties. They chose to offer $1.25 billion in senior unsecured note at 3.250%. Boston Properties intends to use the sale of these notes to pay for outstanding borrowings, use as credit and for typical business needs. This is also a good opportunity for those looking to increase their commercial office portfolio. It indicates it has more than enough liquidity to weather this storm and not use it's 51.8 million square feet of assets as collateral.

Slowing but not falling

JBG Smith has released its first quarter results and it indicates the worst might be over. The net operating income of JBG Smith increased from $328.2 million to $334.6 million compared to the end of last year. Their operating commercial portfolio was nothing to write home about which is good in both ways, considering the circumstances. Leased properties decreased from 91.4% to 91.0%. Occupied space went from 88.2% to 88.7%. Again, this is from 31 December 2019 to the end of the first quarter of 2020. The V-shape recovery might well see businesses resume renting office space as they were before the crisis hit. However, office lease negotiations may rise in tandem.

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