A freeze is settling on commercial property markets.
Buildings that bustled with diners, drinkers and shoppers just weeks ago have gone quiet. Hotels that housed vacationers and business travelers are empty, while the industry in the U.S. loses an estimated $1.4 billion a week. Offices are eerily quiet.
And the tendrils of frost are spreading to industrial properties, apartments, and even student housing — usually stable in hard times. This time, universities are ordering students off campus. As the coronavirus spreads, all the once-reliable havens are mired in uncertainty.
“On the investor side, there’s widespread panic,” said Alexi Panagiotakopoulos, partner at Fundamental Income, a real estate strategy firm. “There’s downward pressure on every aspect of every asset class.”
Assets can’t be valued when tens of millions of people around the world are locked in their homes and commerce has largely come to a halt, with no idea how long the crisis will last. Lack of consensus about the current or future value of assets is also threatening property sales, closing an exit door for investors and landlords.
The even bigger question is what will come when the crisis recedes. For every kind of property — not to mention a wide range of human activity — there will likely be long-lasting changes, said Scott Minerd, chief investment officer at Guggenheim Partners.
Without clarity on those big questions, investors will be reluctant to part with their cash. Investment activity could fall by 45% this year in the U.S., which would be more than the decline following the 9/11 terrorist attacks or the 2008 financial crisis, according to Kiran Raichura, senior property economist at Capital Economics.
Already, large deals are collapsing or getting postponed.
The Canada Pension Plan Investment Board’s planned sale of a 50% stake in the 900 million pound Nova development in London’s Victoria district collapsed on Friday. Singapore-based ARA Asset Management Ltd., which was lined up to purchase the pension fund’s half of Nova, will no longer complete the deal, according to people familiar with the matter who asked not to be identified because the details are private.
ViacomCBS Inc. said earlier this week it’s suspending plans to sell Manhattan’s Black Rock building because the outbreak has prevented would-be buyers from visiting the property, the former headquarters of CBS.
It’s also unclear what will happen with mall owner Simon Property Group’s $3.6 billion bid to buy rival Taubman Centers Inc. Both mall operators have closed most of their properties and Taubman’s shares have been trading below the proposed deal price for more than two weeks.
In the U.K., more than 11 billion pounds ($13 billion) has been frozen in property funds with appraisers warning that the virus makes it impossible to assess their value. The merger of brokers LSL Property Services Plc and Countryside Plc is already on the scrap heap and other deals in London are being delayed.
China’s office market, meanwhile, was being hit by plunging rents and high vacancy rates amid slower economic growth even before the coronavirus. Office vacancies in Shanghai, China’s financial heart, may climb to 28% next year, according to Colliers International Group Inc.
Shares of U.S. real estate investment trusts, particularly those that own malls, have been hammered. Brookfield Property Partners LP, which made a big bet on malls with its $15 billion acquisition of GGP Inc. in 2018, expects its tenants to face “severe consequences” in coming weeks with substantial parts of the economy shut down.
Chief Executive Officer Brian Kingston sent a letter to shareholders on Friday noting the firm has $6 billion in undrawn credit lines and cash on hand.
“From a corporate liquidity perspective, we are in good shape,” he said. “We expect this will be more than sufficient to weather a protracted downturn.”
Companies such as Hilton Worldwide Holdings Inc. and Caesars Entertainment Corp. have been tapping backup loans to shore up their finances. The sudden threat to tenants that pay rent is an unwelcome shock for office and warehouse landlords. For retail and hospitality property owners, it could be fatal.
“The implications could be far-reaching, but quantifying these is highly speculative at present,” said Matthew Saperia, an analyst at Peel Hunt.
With so much uncertainty, the availability of credit is shrinking. New financing for hotels, malls and senior living has mostly disappeared. And debt that’s reliant on income from building tenants is suddenly very risky.
As much as 15% of loans on commercial property could default over the next couple of years if there’s a recession, according to Mark Fogel, CEO of Acres Capital, a private commercial real estate lender.
“Nobody knows where deals will be priced and nobody knows just how long this issue is going to affect the world and how much it’ll affect the underlying collateral,” Fogel said.
There won’t be a “back to normal” once all of this is over, according to Minerd, who sees demand shrinking for virtually every type of commercial real estate.
Shopping malls will close permanently, demand for office space will decline — even industry conferences and social events could be replaced by telecommuting, he said. Guggenheim had approximately $275 billion in assets as of Dec. 31, about 20% of that in real estate.