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Pandemic Prompting CRE Investors Into Flights To Creditworthiness, Safety

Last year, Glenfield Capital shifted its investment strategy to focus on office buildings that housed tenants with impeccable credit. Now, with a pandemic threatening to toss the global economy into a recession, that shift was downright prescient, Glenfield founder James Cate said.

Passengers walking through a terminal at Hartsfield-Jackson Atlanta International Airport during the 2020 coronavirus pandemic.

“We have to consider the real estate, but we're probably more concerned about the tenancy,” Cate said. “We're credit-focused. And I think that's probably exacerbated with what's happening right now.”

Glenfield is still determined to invest $200M in office real estate throughout the Southeast this year, double its outlay last year, during a time when capital markets — and the debt that fuels commercial real estate investments — is in a state of deep uncertainty as a result of the coronavirus outbreak.

The outbreak of COVID-19, the disease caused by the novel coronavirus, has many investors now reconsidering investments and pursuing the least risky of purchases, buoyed by tenants with credit scores that could promise their resistance in a recession.

“I think the future is looking a lot more uncertain than it was 30 days ago due to the coronavirus. It could have a much larger impact in 30 to 60 days. There's concern on business stopping,” Walker & Dunlop Managing Director Alfred Means said. “That could take us into recession.”

The pandemic is complicating the underwriting of real estate investments, which also has some investors switching to buildings with solid tenants. Last year, Glenfield Capital purchased $100M in office assets in Atlanta and Jacksonville, Cate said. The tenants in those facilities: Bank of America, Aetna, Oracle, the federal government and Aaron's Rents.

“There are so many unknowns because we're so early in this. The multitude of [potential] consequences, it's hard to underwrite those now,” he said. “Then there's the next layer — the next round of industry or companies that will be harmed. And I think some of that is unknown yet, and we don't know how deep this is going to go or how long this will last.”

A computer graphic of the coronavirus, produced by the Centers for Disease Control and Prevention.

Stan Johnson Co. Managing Director Margaret Caldwell said there is an expectation that the pandemic will hit retail hard, throwing even more mall tenants into bankruptcy. That has investors looking instead to power centers and grocery-anchored centers — places with retail tenants that serve consumer necessities. That could force capitalization rates on those centers even lower.

In Metro Atlanta, retail cap rates were between a high-6% and a low-7% range as of last year, according to a Marcus & Millichap report.

“There will be a strong market for power centers,” Caldwell said. “I don't see that being changed whatsoever. [Rates] could even go down even lower.”

The fear and uncertainty are palpable, but so far, investors are still pursuing deals and likely will as the pandemic progresses, Patterson Real Estate Advisory Group founder Lance Patterson said. After all, this is a global-pandemic-fueled downturn, not one caused by unruly financial markets or speculative developers. If anything, the exact opposite was occurring up until Wall Street swooned earlier this week.

But Patterson said investors will be more deliberate in their investment decisions moving forward.

“The situation can certainly cause some capital to think, and I think appropriately so, about what they should be doing and maybe in some cases take a pause for a period of time to see how things sort themselves out,” Patterson said. “We don't sense any panic, but we do see thoughtful analysis from capital on what they should be doing right now. The worst we've been seeing is capital saying, 'You know, look, I need to take a two-week pause or at worst a 60-day pause.'”

Means said the volatility with the 10-year Treasury rate, which has sunk below 1% in recent days and continues to fall, is wreaking havoc on debt markets in being able to price in loans. That has some borrowers actually pulling out of deals even after they paid their slice of a deposit because the rates on loans now can save them even more money long-term.

“They could now get a rate of 3%. And they're willing to walk away from a 2% deposit so they may be able to get a loan at 2% and save 75 basis points over the next 10 years,” Means said. “Capital markets are chaos, and they don't know where to lend at right now. And things are changing literally by the hour with spreads.”

CORRECTION, MARCH 12, 2:26 P.M. ETAn earlier version of this story gave the incorrect name of the company Glenfield Capital. The story has been updated.