Are There Any New Real Estate Sales and Developments in the Age of COVID-19?
Originally published on July 13, 2020
Updated on August 16th, 2022
With the coronavirus pandemic shaking up nearly every industry on the planet, you might be surprised to hear that certain parts of the real estate industry are doing well. In fact, new sales and development projects continue even in these uncertain times.
Nick Banks, Principal and Managing Director of Avison Young, recently sat down with John VanDuzer, CPA and partner with James Moore & Company’s Real Estate Services Team, to discuss the state of American real estate, including how he expects new deals and developments to shake out in the second half of 2020 and beyond.
The ‘90-Day Gap’ in Deals
From Banks’ personal experience with Avison Young, the deals already in motion before the pandemic struck have progressed or been completed at this point. That’s not to say there weren’t challenges; inspections, issues with lenders and merely getting people where they needed to go presented problems. Shelter-in-place orders and the looming threat of COVID-19 have made traveling and meeting in person far more difficult than usual.
However, Banks reports that despite those minor issues, the pre-COVID deals his firm handled have largely seen forward motion. Once the pandemic hit, he describes a 90-day gap in which little new business was coming in—understandable, given the economic uncertainty. He feels that real estate will likely feel the effects later this year.
“ur team would normally be busy working with businesses, or buyers, or sellers on a continuous basis. There was really about a 90-day pause where very little new stuff happened,” he said. “That is starting to come back…now that businesses are reopening, the economy is coming back. We’re starting to see transaction volume increase, which is a good sign. Folks are out there wanting to do deals again.”
Distressed Properties Predicted to Hit the Market
As we all know, the pandemic has affected business owners who can’t afford their rent. This in turn leads to building owners who can’t pay their mortgages. Over 25,000 retail stores have closed during the pandemic so far. Even Apple has closed a quarter of its retail locations. Experts predict that 55-60% of those closures will be mall-based stores.
When asked about whether he’s seen distressed properties start coming on the market, Banks said, “What we’re hearing from some of the CMBS lenders and the special services is that they are starting to see signs of default,” meaning that they expect to see plenty of distress properties up for sale soon.
If you’re hoping for a bright side, he mentioned that “there a lot of capital that has been waiting patiently on the sidelines for buying opportunities. I would expect that as distressed properties hit the market, that there will be a lot of buyer activity.” Thanks to that capital, Banks doesn’t anticipate a drastic drop in overall pricing or cap rates widening at a substantial rate.
Aspirational vs. Needs-Based Developments
Developments are also seeing some activity, although it’s certainly slowed since the pandemic began. Banks reports that he has noticed developments in progress before COVID-19 are continuing swiftly.
But not many new projects are beginning, particularly if they’re aspirational or speculative. This is unsurprising, given the uncertainty surrounding the economy and when we might see a vaccine developed. Until then, few developers will want to take risks when we can’t predict how the coming years will look.
Plenty of developments have been started or continued during the pandemic—largely needs-based projects. For example, as the food and retail delivery sector soar in profitability, manufacturing, storage and office-based needs increase. These projects are necessary to our new normal, so they’re a priority for developers, industry leaders and the construction sector.
So while there aren’t many bright sides to the COVID-19 pandemic, parts of the commercial real estate sector certainly continue to thrive. And when distressed properties start hitting the market, we can expect a flurry of activity from companies waiting for just the right opportunity.
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