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The Capital Markets Have Already Entered The Post-Covid Era

Different asset classes of commercial real estate may emerge from the coronavirus pandemic forever changed, but looking at the capital markets overall, normalcy might finally be restored.


Taken together, investment activity and prices in all commercial asset classes have rebounded to 2019 levels, with the successes of industrial and suburban multifamily real estate balancing out the struggles of hotels and shopping malls, multiple experts told Bisnow. It seems that the “new normal” that was bandied about during the worst of the pandemic has arrived.

“The commercial property world in total is back to previous levels, but the underlying composition has shifted,” Real Capital Analytics Senior Vice President Jim Costello said.

The gap in asking prices between buyers and sellers in hotels and some parts of retail has begun to shrink, and buyers of distribution centers and the more popular types of multifamily are not acting as if rents will keep soaring at the rates they have this year, said Eric Enloe, a managing director for JLL’s valuations practice based out of Chicago. The fact that the growth sectors are unsustainably hot while the weaker sectors show signs of life has some feeling they are on firm footing for the first time since the coronavirus threw the world into disarray.

“I do feel like the current strategy that most investors have is their post-Covid strategy, and that really started to occur when vaccines became readily available for anybody that wanted one,” Enloe told Bisnow.

The rise in the delta variant may be wreaking havoc on office occupiers’ plans to bring their workers back, but it hasn’t changed investors’ outlooks on office or any other sector, Enloe said. Though the wait-and-see period for tenants weighing their space needs ahead of lease expirations may be prolonged, the bulk of transactions in the office market this year has been for buildings with stable tenant situations.

The delta variant’s dampening effect on the economic recovery could reintroduce a little uncertainty in the investment community at large, which might then translate to a milder third quarter than might have been expected even a month ago, CBRE Global Chief Economist Richard Barkham said. When occupiers finally feel that they have a handle on who will be in their offices and how often, owners of buildings with current or impending vacancy will similarly come to terms with whether their properties are among the haves or have-nots. 

“There still needs to be a little bit of price adjustment on that stock, but we don’t know [how much] because there haven’t been enough trades,” Barkham said.

The way that the delta variant has shaken investor confidence might actually be a net benefit to commercial real estate, as institutional investors could shy away from the stock market and the 10-year Treasury bond yield is far below 2%, Barkham said. 

Real Capital Analytics Senior Vice President Jim Costello

“If you’ve got a pension fund and you can only get 1.27% yield out of the bond market, you’re going to look at the real estate market for income,” he said. “But normally, when you’ve got strong economic growth and inflation, bond rates go up. At the moment, we’ve got growth, inflation and negative bond rates. Admittedly, there’s some nervousness from Covid, but, in general, that dynamic is beneficial for real estate.”

Throughout the pandemic, large corporations have responded to uncertainty by building up their cash reserves and refinancing debt while interest rates are historically low. As investors begin to look forward again, there is once again a huge pile of capital waiting to be deployed. Though the distressed asset market for which much of that capital was raised never materialized, so much money is out there that it will likely find its way to every asset class in some form or another, Barkham said.

For shopping malls, which may have the gloomiest outlook aside from the strongest performers, that capital may be invested in redevelopment or repositioning projects, as the drumbeat for conversions of old anchor boxes into distribution centers has grown louder. That the long-term future of commercial real estate involves a smaller portion devoted to retail is not exactly news to the industry. Still, some retailers have emerged from their defensive positions and begun to look for new locations, Enloe said.

The hotel industry may have a more difficult path to chart, as its pandemic conditions seem the most likely to be temporary while being the most damaging in terms of present-day income. Even as sellers are dropping their asking prices, a large swath of lenders exited the hospitality sector entirely, Barkham, Enloe and Costello agreed. Many that stayed have much more stringent requirements in terms of loan-to-value ratio, limiting the possible yield that bargain hunters could reap from buying in.

Even with all those challenges, owners of hotels and shopping malls are still seeing a light at the end of the tunnel, Enloe said. To whatever extent they fail to make it all the way back to the 2019 state of affairs, it will likely be down to conditions that were already having an effect before the pandemic, like decreasing foot traffic at malls and fewer lenders available for hotels.

Similarly, the factors driving industrial and multifamily were already in place, making those sectors more enticing as income plays, even as yield may be tougher to come by. If it sounds mundane, then it is the kind of mundane that comes as a relief after the past year and a half.

“Investors are really driving their decisions based on the fundamentals of real estate, with their strategy not being impacted by Covid,” Enloe said.