COVID-19 has done a number on the American economy, with unemployment rates reaching 14.4% in April. By November, that number had dropped to 6.7%, but we’re still seeing fallout because consumers now aren’t using certain businesses in the same way.
In Florida, a shift in consumer behavior is driving much of this downturn rather than government-mandated restrictions. For example, people aren’t traveling as frequently as in pre-pandemic days, leaving much of the state’s hospitality industry in a difficult position.
However, it isn’t all bad news, as some businesses are thriving in this economy. Here’s a look at how COVID affects various industries throughout the country and what it may mean for commercial real estate:
Perhaps no sector has experienced more significant COVID challenges than the hotel industry, which has seen occupancy and revenue decrease at record levels.
In Q2 2020, overall occupancy fell by over 60% from the previous year, despite the average daily rate (ADR) falling by over 37%. Rooms were cheaper, but people still weren’t renting them. The result: revenue per available room (RevPAR) is down by 75%.
The Royalton Hotel NYC, once considered one of the city’s most exclusive properties for the rich and famous, sold to investors for $41 million in September. This price tag is a 25% reduction from its selling price in 2017. People simply aren’t visiting hotels as much during the pandemic, and it’s causing issues for investors.
Another industry that’s struggling is retail, which saw total sales decrease by 8.1% in Q2 of 2020. This decline is the most significant since the recession of 2009.
However, it’s worth noting that some retailers are thriving in this economy, particularly e-commerce outlets and those that sell essential goods. It’s the smaller stores, certain big-box retailers, and shopping malls are struggling, although some of these spaces were being repurposed, even before COVID.
With the pandemic forcing employees to work from home, the office sector is experiencing some challenges keeping spaces occupied. The second quarter of 2020 saw leasing activity fall by 44% from the previous year, and the national office vacancy rate increased to 13%.
Demand for downtown office space is decreasing at a more rapid rate than suburban real estate. This trend suggests that offices will still have plenty of value in the future, even if space in prestigious high-rises remains in less demand.
Again, it isn’t all bad news—some industries are actually reaping rewards from the change in consumer behavior.
Amazon’s e-commerce successes are well-documented, with the company posting a record-level revenue increase of 37% during the second quarter of 2020.
This trend isn’t exclusive to Amazon or online retail, though another windfall is related to the fortunes of e-commerce. The industrial and warehouse sector is seeing a bump due to the shift away from brick-and-mortar stores. Warehouses and distribution sites are in high demand, and these properties are experiencing low vacancy rates and asking for record-high rents as a result.
Distributors are also relying less on China and other overseas entities because of the logistical issues with shipping goods right now. Keeping the supply chain moving involves ordering more products at once and storing them until needed, which is good news for industrial property owners.
Also, since we’re dealing with a global health emergency and have an aging population, it makes sense that there’s a greater need for laboratory space. The life sciences industry is exploding, with properties re-selling for as much as 22-times their previous values.
Strong tenant demand is driving this trend. And it could continue because of the need for facilities adhering to the Good Manufacturing Practice regulations for human pharmaceuticals. Labs that can meet these requirements have immense value, and many remain open 24 hours per day to keep up with demand throughout the pandemic.
Multifamily properties are going through the ups and downs of the current economy. Despite the harsh economic downturn in Q2, there wasn’t quite the expected rise in vacancies in apartment buildings and condos. The assumed reason: stimulus packages provided people with unemployment benefits aimed at keeping a roof over their heads.
An average month’s rent has dropped by 1.4% since Q1, and vacancy rates increased slightly. But it could have been much worse, given the high unemployment rates.
Urban areas and states with particularly high unemployment rates are being hit much harder than others, and there is a great demand for affordable housing all over the country.
Of course, the challenges caused by COVID-19 are driving many changes to the commercial real estate industry. People can’t interact at the same levels as this time last year, so there’s far less immediate need for spaces that encourage gathering or travel.
But there is some light at the end of the tunnel that could see us return to normalcy sooner rather than later. With the Pfizer and Moderna vaccines rolling out to the public and others potentially soon to follow, we might largely put this pandemic behind us by Q3 2021.
At that time, hotels and retailers could see their numbers start to rebound, and demand for all office space could return, as well. For CRE investors, the coming months are incredibly important because a potential recovery could drastically change the economic landscape again.
For more commercial real estate insights, property management services, or CRE investment guidance, reach out to Morris Southeast Group at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or via email at firstname.lastname@example.org.
Sunrise, FL; December 16, 2020 – Morris Southeast Group President Ken Morris, SIOR, RPA, announced 100,000 square feet of recently completed South Florida lease and sale transactions, plus a new listing in Plantation, FL.
Ken Morris, SIOR & Adriana Lilly represented Keratin Complex in a seven-year lease for 55,134 square feet at the Hillsboro Technology Center from Bristol Development and Butters Development. Keratin Complex is a leading maker of shampoos, conditioners, and related hair-care products. The company revolutionized the beauty industry in 2007 when a group of industry innovators discovered a new way to care for hair by merging proven keratin science with cutting-edge technology. They created Natural Keratin Smoothing Treatment, a first-of-its-kind smoothing treatment that pioneered the way to healthy, smooth, frizz-free hair. Keratin’s products are favored by salon professionals.
Ken Morris, SIOR, also represented Buena Vista Terminal, LLC in the sale of a property located at 123 NW 51st Street in Miami, FL. The property consisted of a 21,450 square feet building currently used for storage in the Buena Vista neighborhood of Miami and sold for $1,875,000. The Buena Vista Bus Terminal Building was originally constructed in 1939 and was a major transportation hub in South Florida. Used for decades as warehouse space, the property is ripe for conversion to multifamily housing, office suites, art storage, an art gallery, and several other options.
In addition, Ken Morris represented Polenghi USA Inc. in their 36-month lease renewal of 24,047 square feet of industrial space located at 720 Powerline Road in Deerfield Beach, FL. The Milan, Italy subsidiary of Polenghi Group converted a vacant warehouse building into a lemon juice bottling plant. These lemon specialists import about 25,000 liters of lemon juice weekly from Italy and then bottle it for distribution in the U.S. Morris originally put Polenghi in this space in July 2015, when the Italian company opened its U.S. operations.
Earlier this quarter, Morris completed a lease transaction on behalf of a longtime client, The Legacy Companies, for 78,585 square feet at 2555 Kuser Road in Hamilton, New Jersey. It was the third distribution center transaction Morris has completed for Legacy in 2020. Earlier this year, Morris represented The Legacy Companies in a 110,000-square-foot industrial property
lease in Reno, NV (also owned by Scannell Properties). The firm also executed a renewal of 61,137 square feet plus 8,700 square feet of expansion space at a Weston, FL property on behalf of Legacy in a building owned by a U.S. subsidiary of UBS.
In addition to the closed transactions, Morris has been hired by BHT Partners to lease the Medical Services Building located at 4101 NW 4th Street in Plantation, FL 33317 that consists of a total of 48,560 square feet. The building is a medical office building located on the campus of Plantation General Hospital.
For more than 35 years, Morris Southeast Group has been recognized as one of South Florida’s leading providers of commercial real estate services. Located in Sunrise, FL, Morris SE is a full-service firm specializing in owner and tenant representation, multi-market services, and investment sales in the office, industrial, and retail sectors throughout Miami-Dade, Broward, and Palm Beach Counties. Further, the firm serves corporations, private investors, and entrepreneurs in various U.S. markets through its membership in the Society of Industrial and Office Realtors® and other professional real estate relationships developed over years of industry networking. For more information, contact President Ken Morris at (954) 474-1776 or visit www.morrissegroup.com.
When people get involved in commercial real estate investments, their goal is to increase the property’s value, diversify portfolio holdings, avoid volatility while hedging against inflation, and gain some tax benefits. In short, it’s about making money.
One of the available tools to achieve that goal is leverage. Also known as debt-financing, the idea is that in some cases, assuming debt on a property may be more financially lucrative than bypassing a loan. That being said, there is a time when leverage makes sense and, more importantly, when it does not.
In the simplest of terms, positive leverage occurs when the cost of borrowing money is less than the return on that property. This results in greater profits for the investor, ROI that can then be used to upgrade the property or diversify into additional properties, especially those that are less risky.
For example, let’s say a property comes on the market for $3 million. The buyer faces two options:
Depending on economic indicators, leverage may not be in the investor’s best interest, particularly if the cost of borrowing money vastly diminishes the cash return of the investment. The closer the cash-on-cash leverage result comes to the all-cash result, the less wiggle room there is to survive any unanticipated crises, such as immediate repairs to the property or an economic slump.
When leverage makes sense, some investors can fall into the assumption trap—assuming that if some leverage on a property deal is good, then more property leverage is better. But as the saying goes, never “assume” anything, or you can make an “ass” out of “u” and “me.”
To avoid the potential pitfalls of leverage, investors should wisely consider some key points:
Not surprisingly, COVID has left its imprint on leverage. And for guidance, many experts look to the Great Recession. Prior to 2008, a large number of loans were issued at peak property values and with high leverage amounts in the 85% and 90% range. When the bubble burst, investors found themselves in dire straits, with outstanding debt more elevated than the properties’ value. The solution for investors was to de-leverage, look for new, smaller mortgages, or default.
COVID is this and so much more—the fallout from the pandemic has been swift for specific sectors, and the overall impacts for CRE are still accruing and yet to come due. While interest rates are extraordinarily low, investors are also looking at a market that has resulted in higher-than-normal vacancies and tenants re-thinking space needs. And many tenants may not be able to return as Federal-relief loans are expiring in the face of surging cases. Nevertheless, there are two key developments:
The biggest takeaway is that any decision to use leverage can only be made on a case-by-case basis. Excellent financing, for example, can easily become undone with the purchase of the wrong property or by overlooking current and expected trends and comparable properties. Using leverage properly can only be achieved with sufficient due diligence.
2555 Kuser Road in Hamilton, New Jersey
Sunrise, FL; November 30, 2020 – Following a record third quarter in leasing and sales activity for his firm, President Ken Morris, SIOR, RPA, of Morris Southeast Group announced a recently completed lease transaction on behalf of his longtime client—The Legacy Companies—for 78,585 square feet at 2555 Kuser Road in Hamilton, New Jersey.
The owner of the Hamilton property is Scannell Properties. Terms of the lease were not disclosed. Mike Witco, a principal with Chilmark Real Estate Services LLC based in Morristown, NJ, provided local market knowledge and participated in the lease with Morris in representing The Legacy Companies.
This was the third distribution center transaction Morris SE has completed for Legacy in 2020. Earlier this year, Morris represented The Legacy Companies in a 110,000-square-foot industrial property lease in Reno, NV (also owned by Scannell Properties). The firm also executed a renewal of 61,137 square feet plus 8,700 square feet of expansion space at a Weston, FL property on behalf of Legacy in a building owned by a U.S. subsidiary of UBS.
Based in Weston, FL, The Legacy Companies is a leading foodservice manufacturer and consumer appliance company that sells a host of brands and products, including refrigerators, freezers, ranges, microwave ovens, wine refrigerators, ice makers, water dispensers, laundry appliances, and much more.
Learn more at https://www.thelegacycompanies.com/.
For more than 35 years, Morris Southeast Group has been recognized as one of South Florida’s leading providers of commercial real estate services. Located in Sunrise, FL, Morris Southeast Group is a full-service firm specializing in owner and tenant representation, multi-market services, and investment sales in the office, industrial, and retail sectors throughout Miami-Dade, Broward, and Palm Beach Counties. Further, the firm serves corporations, private investors, and entrepreneurs in various U.S. markets through its membership in the Society of Industrial and Office Realtors® and other professional real estate relationships developed over years of industry networking. For more information, contact President Ken Morris at (954) 474-1776 or visit www.morrissegroup.com.