Six Months into the Pandemic, Leading Investors Outline the State of Real Estate

Amazon e-commerce warehouse in Madrid, Spain / Wikipedia, Álvaro Ibáñez, CC BY 2.0

Since the beginning of the spread of COVID-19 in March, some real estate sectors are growing while others are contracting. At the Urban Land Institute (ULI)’s fall meeting, Owen Thomas, CEO of Boston Properties, explained that the biggest gains are being seen in data centers, industrial, science, self-storage, and healthcare properties, while residential, lodging, shopping centers, and malls have seen the greatest declines.

Thomas asked a panel of real estate investors with more than $300 billion in assets to provide their take on the current real estate market.

He noted that in July 2020, e-commerce sales were up 60-70 percent over the same time the previous year.

According to Hilary Spann, managing director and head of the Americas for real estate investments at CPPIB America, Inc., this e-commerce growth is occurring among all demographic segments, even those who previously preferred shopping in person. Even after the pandemic, she thinks e-commerce will succeed in keeping these new buyers.

With the digitization of the U.S. economy and the growth of online shopping and entertainment, there has also been massive growth in data centers and last-mile warehouses and distribution facilities. AJ Agarwal, senior managing director at Blackstone added that “we are seeing less infill warehouses in cities, and more 20 miles or so outside urban centers.”

For Francois Trausch, CEO of Allianz Real Estate, the trick has been how to figure out what people are doing in the real world via online proxies. For example, Allianz is now tracking Open Table reservations in major cities around the globe, as lunch reservations can be viewed as a proxy for nearby office building occupancy. “In Germany and other parts of Europe, we can see from Open Table that things are essentially back to normal. But in New York City, reservations are down 40 percent.”

He also noted that from his analysis, Asia seems to have largely overcome the coronavirus. “China is back at work. They have unbelievable capabilities and can administer COVID-19 tests to 9 million people in the city of Qingdao in five days; that’s something Paris could never do.”

Thomas noted that with any recession, demand for office space goes down, but over the long-term, office building development is tied to the location of jobs. “Where will jobs go? We are seeing an out-migration from cities into suburbs.”

He added that “working from home is here to stay.” There’s only 20 percent occupancy in office buildings in the U.S. right now, and those numbers may not come back to where they were post-pandemic.

All panelists seemed bullish on the long-term value of the world’s leading cities. “Our creative cities can’t experience disruption forever,” Spann argued.

While she sees Millennial families leaving the city for nearby suburbs, many people want to stay in the city. “With a viable vaccine, cities will continue to thrive over the long term.”

Across all real estate sectors, “the biggest change has been the impact of the fiscal stimulus,” said Agarwal. The stimulus, combined with recent actions by the Federal Reserve, means that “financing costs for real estate are now 30 percent less than they were pre-COVID.” But this has not translated into increased investment in certain sectors.

All were also negative about the prospects for shopping centers and malls. Frausch wondered whether malls can fill their vacant spaces, whether there are enough large retailers who will take on the risk. He sees a positive trend in the re-purposing of malls as hospitals, offices, and community spaces. “In Japan, there are now educational classes in malls.”

The investors then discussed the future outlook for hotels. When a vaccine is developed, Agarwal thinks there will be an explosion of leisure travel to resorts. But what is considered essential business travel will be redefined, and many trips will be deemed unnecessary. As a result, business hotels in cities will face continued challenges.

When asked what they foresee as the #1 topic in six months, answers were all over the board: the efficacy of vaccines, the distribution of vaccines, tax burdens for real estate development, and what shape the recovery will be. Frausch explained: “We could have a V-shaped recovery, or a K-shaped one, which bifurcates the economy into one that does well for some people and not well for others.”

Perhaps one positive note: the COVID-19 recession could also yield some innovation in the building sector. “We’ll soon see new companies that enable the online visualization of construction sites” — software that better facilitates the collaborative, virtual planning and design of projects, Spann said.

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