What is your advice for real estate investors right now?

My advice to commercial real estate investors is wait until the containment of the virus shows marked progress. There will be plenty of opportunities in the second half of 2020, but again, until the progress on the containment is clear and consistent, I would wait.

What are your predictions for the commercial real estate sector for the next 12 months? When do you think we might see any meaningful signs of recovery?

I think a lot of it is contingent on containing the virus and, in particular, the emergence from lockdown. The United States is a little bit slower than we expected it to be in suppressing the virus, but if we get it under control [in June, July, August], we think that will be enough. If you look at the real-time data for restaurant bookings, they are shooting up in the states that have come out of lockdown. The restaurant sector is picking up quite quickly, and the lodging sector is picking up very quickly. Once we come out of lockdown, there will be a bounce back in the economy in the third quarter, and it will continue into the next year. And the forces behind that are the pent-up demand, and the huge stimulus that has come from the American government. All of those forces will give us an economic recovery.

Let’s be clear: we don’t see the economy going back to pre-COVID levels. A lot of the labor that was replaced in the hospitality and restaurant industries will be re-employed quite quickly, so we think at the end of the year, unemployment will be down to 10 percent. But it will take five or 10 years for unemployment to come back to five or six percent. It will slow down a bit as businesses try to negotiate and think about the post-COVID 19 world.

One of our models for that is China, which has already pretty much come out of lockdown, and we’ve seen the Chinese economy coming back quite quickly. Now, again, let’s not be overly optimistic. It will not go back to where it was before, but it will bounce back.

What does that mean for real estate? Let’s deal with the occupier side first. I think we see a one-year, two-year, three-year recovery. The industrial and logistics sectors will bounce back very quickly. It may bounce back to pre-COVID leasing in about a year, based on the growth of digital economy and e-commerce. So, we see leasing come back in industrial most quickly. We see probably multifamily coming back within a year or 18 months, as the labor markets stabilize and people feel comfortable to take on rental commitments. But multifamily really depends heavily on the jobs market. If the jobs market comes back substantively by the end of the year, that should run the economy through 2021.

I have noticed quite a sharp pick-up in the single-family housing activity. The low interest rates are probably driving that. I think that market might come back much quicker than people expect. Part of its is the lower mortgage rates and social distancing in single-family construction is much easier. So, look to the housing market for a bit of an early revival.

I think it will take at least two years for office leasing to recover. But I think there’s a level of debate around office leasing. We are hearing a lot of companies say: “working from home works very well, we think we can extend it.” We don’t know the full truth of it yet. We have, on the one hand, corporations saying they will reduce the amount of office space they have, and other corporates saying they need more office space [for social distancing]. It might be tempting to say those two things will nix each other out. But we don’t know yet. I personally think a lot of the companies that are saying that they will allow people to work from home are the big tech companies and they spent the last 10 years building out very expensive [office] platforms in very expensive markets. So, you expect them to talk the market down, to get concessions [from their landlords]. I don’t fully believe it. People like to cluster together. Companies that want to hire the best talent are not going to hire the best graduates and then tell them to stay at home. People want to become part of something, and I am not really sure you can do that in a working-from-home model. But I would say that potentially, in the moment, you might have a strong revival of suburban office, because it tends to be much less densely occupied and more easily accessible by car. And there’s obviously going to be a cyclical downturn in office demand, just because the economy is in a recession. We don’t really believe the death of the office story at all, we think it’s overhyped.

And then we come to the retail sector. And the retail sector probably got a three-year recovery. And there we may have some structural downshifting in retail leasing as more retail shifts online. Do we think that retail is dead? No, it’s just way overblown. Retail is a leisure activity, as well as a means by which you get your necessities. Lively, interesting retail places are not dead at all, but we may see a more rapid pace of depreciation.

Other areas are alternatives—and that includes data centers, they are likely to be positively impact. There are some at least short-term questions around student accommodations and seniors housing. Student housing depends on when universities reopen, but I suspect they will reopen sooner rather than later, because despite high risk of infection, that age group is not one of the danger groups where COVID-19 is concerned.

Capital markets, there are a lot of fires out there, and it’s surprising how open the capital market are. The issue with capital markets is the need to travel and the need to do inspections. You need to be able to travel to see assets in order to transact them. And the other thing is they need to know what rental streams they are underwrtiting. So, they need to see the labor markets stability—I think that will happen in June, July, August, September. We are probably looking at a revival in the capital markets that will take place in July, August, and maybe in September.

What is your advice for real estate investors right now?

One of the things I am worried about is inflation. If you look at the money supply in the United States, it’s the biggest peacetime expansion of the money supply that we’ve seen. And normally when you put all that money into a supply-constrained economy what you get is inflation.

I would urge investors to treat some of the scare stories around commercial real estate with caution and pay more attention to inflation. And put hedges on inflation, to watch out for the inflation threat.

I think we might begin to see it between 18 and 36 months from now. Inflation is a slippery thing, but everything points to inflation to me, so people want to make sure that they stay invested in hard assets.

The other thing that’s a clear winner out of COVID-19 is the digital economy. So, anything that’s connected to the digital economy—data centers, logistics assets, is a positive.

And the increasingly poor relationship between the United States and China is quite important. I think we will see new zones of production benefitting, so supply chains will kind of reinvent themselves. So, people ought to be looking at the new patterns of production, low cost locations, like Mexico, other places in Latin America, Vietnam, Indonesia. And a certain amount of production might be re-shored, we might see some auto manufacturing come back to the NAFTA region.

What are your predictions for the commercial real estate sector for the next 12 months? When do you think we might see any meaningful signs of recovery?

I think obviously retail is very hard-hit, travel/tourism/entertainment/hospitality are very hard hit, with a dramatic, unprecedented decline in demand. And I think it won’t be a rapid return. All these venues and sector, they are just going to have certain protocols and consumers/users will also be trepidatious about visiting them. The majority of people will be reluctant to do what they did before, they won’t spend as much time as before in a physical environment, they won’t go to the restaurants as much. So even with the ending of lockdowns, people will be tentative until there is a vaccine.

The two main milestones will be ubiquitous testing—anyone who wants a test can get a test, easily.

And the other magic bullet would be a vaccine, and then it would have to deploy on a mass scale. So, let’s say we find a vaccine in September, which would be lightning speed, it would be at least another year before everyone can get.

I think people will start getting back to the office within weeks. But workers and firms will allow, and even encourage, more working from home, because this has been a massive experiment, and a lot of companies are saying “we can monitor you, we can see what you are doing [with video meetings],” so working from home [will be more viable than in the past].

But we’ll always need office. Initially it won’t be as dense, the open office will be socially distant cubicles with plexiglass around the cubicle and everyone wearing a mask. But again, I think with a lot of offices, companies won’t give up their leased their spaces, they won’t try and fight to cancel their lease, they will just use the space differently.

Data centers will be a massive winner, just because there is a lot of online activities. I think industrial, for obvious reasons, [will be a winner]—a lot of product delivery will be coordinated from the warehouse, but not go to the physical store. And that will be another blow for retail. I could see online retail going into the 20 percent of overall retail sales after this. So that’s another winner.

I think storage [will do well] because a lot of people are in flux right now, they can’t afford their apartments because they don’t have a job right now.

Multifamily I think will be fine. For the most part, people are paying their rents, they need a place to live, they’ll find a way to make that work. A lot of job losses were among people who were lower paid workers, but a lot of investment grade multifamily houses workers who make more income.

And then finally I think medical office buildings will be fine. Once the lockdown ends, there will be a pickup in demand for medical buildings and hospitals.

In terms of the economy overall, we’ve seen massive Fed intervention that we’ve never seen before. I think we’ll probably go into a recession for a couple of quarters. But we’ll probably pop out of it to positive growth territory after the fourth quarter of this year, with a rebound in demand and people going back to work. There will be high unemployment, so that will be a drag on demand, and it will take a couple of years for us to get back to where we were before, to the 5 or 6 percent long-term average. Consumer spending will be down, consumers will be a lot more conservative, and wages will probably not be rising either.

What is your advice for real estate investors right now?

I would say have confidence. This was not created by something bad in the economy, it was created by an exogenous event, a meteor hitting the earth out of the blue. This is not like the financial crisis, when people had a lot of bad debt, so the structure of the economy was problematic. We don’t have that now. We had a fine economy. What the issue will be is so many people being unemployed. Not everyone will come back to work right away. It will take a while for that huge number of people to be re-employed. I t will not be weeks or months, it will be years.

So, given that, you have to be very careful as a real estate investor. Office is going to be challenged, physical retail, hotel will be challenged. Some segments will be fine—like the upper-end multifamily in good, strong markets will be fine. Grocery-anchored shopping centers will be fine. Hotels and hospitality I think will come back very quickly—by the end of this year, travel will probably be near normal. If it’s at 10 percent now, it will be at 50 percent and then going up every month after that. Gaming, I think that will come back by the end of the year as well, with UV lights, and cleaning protocols, and using every other slot machine.

And then in terms of senior housing, it was obviously hit very hard. There was discussion there that a lot of those operators were operating on very thin margins to begin with.

Student housing I think will come back very quickly, most of it is fairly new, and in a lot of it people have their own rooms. My feeling is by the fall, most universities will be back. Online education is fine as a supplement, but most people don’t want to do it [full-time]. The risk would be if there’s another massive wave of infections in the fall, that might change the scenario.

And industrial right now is pretty strong. Data centers are very expensive, but it’s a good play long-term. There seems to be unlimited demand growth there, it’s radically more demand.

And MOBs are definitely a good idea, I am all the way in on that, it feels safer than a hospital since it’s all outpatient.

I think people like shopping, but they will be more careful about going in, some stores may have limits on the number of people who can go in. I think even malls will have a resurgence by the fourth quarters. A lot of people don’t feel comfortable buying clothes and shoes online, you have to try them on. I think a lot of people feel more comfortable looking at even pots and pans, where and how it’s made. It will be a little bit different, but it will be back by the fourth quarter.

And along the way, leading up to a vaccine, there might be treatments that might treat the symptoms. Remdesivir, they already know it’s efficacious. If they produce millions of doses like that, it will be less scary. So, it’s going to be testing, it’s drugs that treat the symptoms and greatly reduce mortality and then it’s a vaccine.

And I also think there will be self-selection. People who are older or have preexisting conditions are going to say: “I am going to be careful, I am not going to go out.” And as a percentage of the population, that group is pretty small. So I think it will shake down, I think people will get back. Even travel, right now people are still afraid of planes, but if people wear masks, if there’s maybe some spacing on the airplanes with nobody in the middle seat, people have got to travel. With so many things, in business, you have to travel. If I do a deal, I can’t look at a picture, I’ve gotta go there, and look at the property and look at the tenants. So, I think again, by probably the fourth quarter, travel will probably be at half of where it was, and then probably climbing every month as people get more comfortable. And the technology might help too, if you can track where you’ve’ been and it will help contain the disease.

There’s an initial overreaction, people think it’s the end of the world, and it isn’t. Hotel to me would be a great thing to invest in right now, just because it’s so beaten down. And necessity retail is really strong. The demise of real estate is way overstated, the demise of hotels is way overstated, the demise of office is way overstated. People need to work with other people in a physical world. For an older person, in terms of their career, it’s okay to work from home. But for a younger person who’s ambitious and at the start of their career, they need to see their boss and their coworkers and be seen by them. This whole idea that we’ll be working from home is not the bright new world.

Even with high-density development and people saying everyone is going to go to the suburbs, that’s not going to happen. People will just get used to social distancing, they are not going to leave cities overnight.

What are your predictions for the commercial real estate sector for the next 12 months? When do you think we might see any meaningful signs of recovery?

As we reopen the economy, there’s still a lot of angst and uncertainty regarding a second wave of infections, which understandably produces a lot of reluctance on behalf of tenants that would have otherwise expanded or committed to office space and many investors on the sideline. The prospects for consumers and businesses feeling fully comfortable visiting restaurants, resuming physical gatherings, business travel and shopping at retail locations are all very much tied to health concerns and to a medical solution; although I have to say we are already seeing a large release of pent-up demand by people coming out of lockdown in many states. This is great for the recovery but, of course, ironically has the health hazard of more infections if we are not careful in moving toward normalization.

Before there is a medical solution, we expect much of the uncertainty and caution to continue, but various property types are affected very differently. For example, hotels, older shopping centers and those with a lot of small consumer service providers and restaurants are the hardest hit and some are likely to fail. The pressure on department stores is well-publicized and even some fitness names which were thriving before the shutdown may not survive. On the other side of the scale, we have apartments, single-tenant net lease restaurants with drive-throughs, industrial warehouses and self-storage properties which are faring much better. It’s really a mistake to paint the entire real estate industry with one brush. We are generally seeing better-than-expected rent collections [in multifamily, office and industrial], with the exception of certain categories of retail. And those are very encouraging signs, but the level of caution by lenders and buyers in the short term is understandable, given the unexpected shock of the lockdown.

Zooming out a bit, you have to remember commercial real estate was not overbuilt before this crisis and we weren’t overleveraged before this crisis. So, we are in much better shape than we were during the financial crisis. In addition, the government stimulus to offset the shutdown is simply massive and it came fast. Total stimulus to fight this crisis is over 30 percent of GDP and was finalized in seven weeks, compared to 6 percent of GDP formulated in 13 months from the start of the financial crisis in 2008-09. It will take time for this injection of liquidity to work its way through the economy. It may not feel like it right now, but eventually, the scale of the stimulus should play a major role in fueling the recovery and limiting the damage.

Beyond the next six months, and hopefully having a large-scale medical solution to the virus, I would expect to see the return to normal human behavior. People like to be social; they like to work in groups and be part of creative, collaborative teams. But there will be some structural changes to office space use, parts of retail and hospitality without a doubt. The successful examples of working remotely over the past two months are already driving most office users to rethink their space configuration. This will probably cause reduction of space in the short term, but as the economy grows again on the other side of crisis, so will space demand. We saw this after the 9/11 tragedies, but in travel patterns and downtown office space consumption. The question is, who has the staying power, what owners are positioned to get through the short-term to mid-term volatility because they avoided overleveraging, and how will tenants handle the financial pressures? I do think there is going to be a shift toward suburbs, driven more by traffic concerns than anything else, and being closer to where people live, as well as the use of office space rotations and satellite locations. In the midst of all this change, we have seen short-term pain and long-term opportunities time and again, and I don’t think this cycle will be any different.

We expect commercial real estate to do very well in the recovery because there’s so much money out there waiting on the sidelines, needing and wanting the tax-friendly yields the industry provides. There will be distressed opportunities in hotel and some retail and pockets among various property types which will be more driven by the circumstances of the specific building and/or submarket. But overall, I do not see a system-wide commercial real estate distressed market emerging. I actually think the economy has a lot of pent-up demand that we are underestimating. Consumers want to come out and spend. The money that would have been spent in a normal economy hasn’t been spent. Of course, there is a lot of unemployment unfortunately, but the unemployment benefits from the stimulus package should provide at least somewhat of a bridge until companies will start hiring again, hopefully sooner than later. One thing to note is the importance of workforce skill, job training and education as 40 percent of layoffs have been in the lowest income brackets and service workers.

What advice would you give real estate investors right now?

One of our main messages to the market and our clients starting in mid-March was not to generalize. We advocated against becoming distracted by macro statements like “prices are adjusting by x percent” or “prices are not adjusting” or “you can’t trade a property.” Those generalizations can be really harmful at a time like this because every property has its own history, story, tenants and outlook. Our approach has been to go granular, case by case, client by client and talk to them about what their investment goals are, where they are in the life cycle of each asset as an investment and what their needs are. What we have learned from going through five cycles in our history is that there is a solution and execution for every situation, regardless of the market cycle, as long as expectations are realistic. This is how we have been able to close sales and financing transactions throughout the onset of the health crisis. Volumes are clearly down and may be for bit longer as the trading environment is very constrained right now, but deals are getting done. Investors need to know that. So, our overarching advice is to stay active in the market, have the benefit of real time data on your tenants and the local job picture, and consider all options in terms of acquiring, refinancing or selling/exchanging an asset based on an updated strategy.

There are, of course, countless buyers and funds looking for distressed buying opportunities. I think we will see more of that over the next 12 to 24 months than we have seen since 2008-09, and there will be opportunities for acquiring both loans and assets. As I said earlier, we believe it is unrealistic to expect across-the-board distressed pricing of commercial real estate because a lot of sectors and properties just don’t justify that. There will be some price corrections based on the reality of economics, but not an all-out distressed pricing. And those investors that are ready to deploy capital now, are not just looking at the next 6 to 12 months, most are investing over at least a three to five-year horizon, if not longer, and with interest rates being at historical lows, there are opportunities in the market now.We are working harder to bring buyers and sellers together due to the widened pricing gap and we are seeing creative solutions to current market constraints, such as seller financing, or short-term assurance of property income to the buyers. But transactions are getting done as we speak. Once the market opens up a bit with added clarity, I think the market is going to move very rapidly, with a lot of capital wanting to be in this asset class.

What are your predictions for the commercial real estate sector for the next 12 months? When do you think we might see any meaningful signs of recovery?

The pandemic has been especially difficult for real estate owners as social distancing doesn’t mix well with the product offered by many property sectors. The evolving recession will slow the pace of recovery for cash flows. The key aspect to note when thinking about the next year or two is that most major changes that were going to take place over the next five to 10 years are being accelerated into a much shorter time frame. For some sectors, it will be great. Industrial demand will benefit. Demand for single-family homes (most likely rented) should rocket upward. At the same time, retail will have to be reinvented and repurposed at a much faster rate than previously expected. Specifically, for the next two years, we expect steep market rent declines in 2020 on average. These new rents should be flat in 2021 and then grow at a pace a little better than inflation thereafter.

What advice would you give real estate investors right now?

We have firmly entered the era of the non-traditional property sector. We’ve been big proponents of these sectors for years. Cell towers, data centers, gaming, storage, healthcare are generally far more attractive than the traditional core property sectors. We’re also big fans of the manufactured home and single-family rental businesses. We’ve been cautious or outright negative on retail and office for a very long time and this perspective is now further reinforced. Finally, many sectors trade much cheaper on Wall Street than in the private market. The public market offers a no-brainer arbitrage for those with the flexibility to invest in real estate in either public or private markets.

What are your predictions for the commercial real estate sector for the next 12 months? When do you think we might see any meaningful signs of recovery?

Joseph Biasi: In the next 12 months, we expect commercial real estate to struggle. Particularly in the short term, we expect some problems with multifamily, some problems with office, and a lot of problems with retail. Retail, we’ve seen really a large decline in rent collections. We haven’t seen that quite so much in multifamily. From what we’ve heard, a lot of that is that’s due to the expanded unemployment benefits. People are spending their stimulus money on rent and groceries. Office is going to take a little more time [to feel distress], just because companies can burn through some cash, they have some runway. And industrial is obviously necessary for the supply chain, so there’s been some boost there.

When the economy declines, commercial real estate is going to go down with it. And with the economic recovery, the timing really depends there. If everything goes well, and we don’t have another resurgence in infections, we could see a fairly quick recovery, I would say in 2022 we would be back to where we were. However, if we do see another surge and multiple lockdowns, it would be a much more prolonged recovery. The Fed acted very quickly, so we avoided some of the worst-case scenarios. But if we get a second surge of infections, small businesses have kind of used all of their financial runway the first time around, so it will mean more store closures and the recovery would stretch into the middle of the decade.

Another part of this will be affected by how this structurally changes our economy. In retail, there’s more reliance on e-commerce, so retail is going to struggle longer than other property types. It was already struggling and the idea that more people are trying e-commerce will help accelerate that trend. And the other thing we are watching is work-from-home. If work-from-home really takes off, that could hurt office demand and extend the downturn and really take a large bite out of office demand.

Without a surge in new infections, our projection is for a recovery by the end of 2021 or early 2022. That is very optimistic and it really depends on the industry. It will probably take a little bit longer for hotels to recover, just in terms of how disastrous this has been for hotels, they basically can’t do business.

In terms of employment levels, it has taken increasingly longer with every recession to come back to pre-recession highs. We are seeing a slower growth in employment after recessions. This time is obviously different, demand is being artificially propped up by the stimulus, so there should be a bounce-back.”

Andrew Zola: And different metros were obviously hit differently. Las Vegas and Orlando are very dependent on consumer demand, and those markets are obviously going to take longer to recover. Places like Cleveland, Ohio and Seattle, where the economy isn’t as driven by consumer demand, are likely to recover faster.

What is your advice for real estate investors right now?

Joseph Biasi: The advice I would give is, a lot of the time when we talk about trends like work from home and e-commerce, we are talking about “on the margins.” We are not talking about the death of office. What we think about is what does this mean long-term? So, a lot of people could come into the office a couple of days, and then work from home the rest of the week. We are hoping this pandemic eventually ends, and people won’t need to socially distance forever. So, no one’s calling for the death of the office, there was a reason we had offices before and there is a reason there will be offices afterwards.

But we need to think about how this meaningfully changes the structure of our economy. People might live further away from work, allowing them to move out to larger apartments.

People were really enjoying experiential before, people want that kind of experience, so coming out of the crisis, people will still want those amenities.

What a recession does a really good job of is accelerating trends that were happening before—accelerating e-commerce, a shift toward work from home [flexibility].

But some things have proven to work out—industrial has continued to look strong, So, begin to look for deals if you have capital. We are going to see distressed sales. And our research shows that liquidity in a market like this dries up a lot of the time for distressed assets.

Andrew Zola: Realistically, we expect that once the virus is done, we still expect there to be more of a demand-side recession. Consumer spending has dropped off a cliff. So, we are expecting a longer recovery, of a year or two. That doesn’t mean there won’t be opportunities. But it’s going to take some time for us to recover from this. And for real estate investors, once we get out of this, it means it will be a good time to invest and find price dislocation that otherwise wouldn’t be there.