Investors are betting on commercial real estate, undeterred by empty offices and hotel rooms
More than a year after the start of the pandemic, high-rise office buildings are largely empty. About one in two hotel rooms is unoccupied. Shopping centers are struggling to attract buyers.
And yet, by most measures, the US commercial real estate market is in remarkably strong shape. Prices have fallen much less than after the 2008 financial crisis and are already on the rise. The number of foreclosures has barely increased. Pension funds and private equity firms are spending record amounts on buildings again.
The resilience of the market shows how aggressive efforts by the federal government to support the economy have kept homeowners from taking significant losses. Banks have also given delinquent homeowners some leeway, rather than aggressively foreclosing.
This support will not last indefinitely, and there could be a sharp wake-up call for investors when it starts to weaken. Homeowners will face the threat of remote working to the office market, the shortage of business travel and the widespread decline in shopping center activity.
But a number of the world’s largest pension funds have increased their allocations to commercial real estate, which should bring a lot of liquidity to the market, and prices are already rebounding.
Between March and May of last year, commercial real estate prices fell 11%, according to commercial real estate analyst Green Street. Prices since July have risen 7%, wiping out more than half of their pandemic declines.
This turnaround stands in stark contrast to the financial crisis of 2008, when commercial real estate prices in the United States fell 37%, Green Street said, and took years to recover.
This time around, office, retail and accommodation businesses appear worse off than in 2009 in many parts of the country. But public spending has been much more robust. Wealthy people are also widely employed, but being locked away at home has caused them to save more of their income. Much of that money has been invested in stocks and bonds, pushing prices up and interest rates down. This made real estate cheap in comparison.
And with the prospect of inflation quickly becoming the biggest concern of the financial community, more investors in the future may turn to commercial properties with leases that include rent increases that keep pace with inflation. .
“People see it as inflation-proof,” said Eric Rosenthal, managing partner of real estate investment firm Machine Investment Group.
Private investment funds focused on real estate are already on the rise. They had $ 356 billion in cash reserves in April, according to Preqin, roughly double what those funds held at the end of 2009. In a recent survey by Hodes Weill & Associates and Cornell University, 29% of large institutions said they wanted to invest more of their wealth in real estate, while 5% said they wanted to reduce their exposure.
The large public pension funds in California, Kansas and Iowa have increased their target real estate allocations over the past two years. Alecta, a Swedish pension fund with around $ 130 billion under management, last year increased its target allocation for alternative assets, which include real estate and infrastructure, to 20%, from 12%. Real estate is a hedge against the ups and downs of public markets, and low bond yields make it “relatively attractive,” said Frans Heijbel, head of international real estate assets.
The banks have also largely spared the landowners. Normal recessions often produce a vicious cycle of foreclosures. When rents and property values go down, property owners stop paying their mortgages and lenders foreclose, pushing prices down further.
It did not happen this time. Regulators have allowed banks to delay loan payments without having to declare a default. Therefore, the lenders were in no hurry to foreclose or sell the loans.
Christopher Coiley, Director of Valley National Bank‘s
commercial mortgage division in New York and New Jersey, receives two calls per day from funds seeking to buy distressed loans. But he has nothing to sell. “It’s almost funny,” he said.
Government and lender support for the market masked deeper problems. The prices of shopping centers and hotels are falling significantly. Defaults and foreclosures are expected to increase as forbearance periods end and some lenders eventually lose patience. Overall property returns would be worse without the booming warehouses, up 25% from last year.
In a March report, Fitch Ratings said if remote working reduced demand for office space by 10%, building ratings could drop by more than 40%.
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Even the signs of inflation are not entirely positive for homeowners, who borrow heavily and benefit from low rates. Rising consumer prices could drive up interest rates and cause any real estate momentum to run out of steam.
“Instead of that cliff, we’re just going sideways,” said Mark Zandi, chief economist at Moody’s Analytics, who is cautious about the real estate market. “Maybe a little down, maybe a little up, but nowhere fast for a while until we work on those adjustments.”
However, technical reasons force some large investors to buy real estate despite everything. When the prices of stocks and bonds rise faster than those of other assets such as real estate, their share of a pension fund’s holdings automatically increases. This means that the fund has an incentive to buy more real estate just to rebalance.
Some investors buy the seats hardest hit by the economic crisis. In San Francisco, where the share of office space available for rent is the highest on record, according to CBRE Group Inc.,
Drop box Inc.
recently sublet a large part of its head office. Still, the building was sold in March to private equity firm KKR & Co. for $ 1.1 billion, the most expensive sale of an office building in San Francisco in more than a decade.
KKR’s head of real estate in the Americas, Justin Pattner, said he liked the local market. The building lease lasts for an additional 13 years and any vacant space can be converted into high demand laboratory space.
Write to Konrad Putzier at [email protected]
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