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Commercial Real Estate Amid Coronavirus

Mark Blumenthal, Senior Vice President, Partners Capital

Covid-19 is wreaking havoc on many businesses, especially service related, that are dependent upon foot traffic. Everyone is rightfully uneasy as to how this will play out and the ripple effects that it will have on various industries. If guys can’t make a living by being open because they need foot traffic, they also can’t make rent. That rent payment isn’t paid, and a mortgage payment might be missed. Properties could go into default, and the credit rating, if it’s a collateralized loan obligation, could fall. Bondholders could not receive their payments from the servicer. It all has a full trickle down effect from some guy not opening up his 800 square foot restaurant to service, which is how he makes his livelihood. So, it’s a very interesting time right now. There’s no doubt we’re going to get through it. We’re going to see incredible human ingenuity with regards to a vaccine and with regards to combatting this contaminant. I think that this will be a two year rebuilding process just from the short, rapid downward trajectory that we’ve taken with the worldwide economy coming to a slowdown. I think that we’ll be better off in process and procedure moving forward. There will be greater certainty and understanding in terms of supply chain logistics and how we can move needed items around the country and what we’re producing here in our country versus relying on another country. I see this as having long term beneficial growth for us and I think it’s a great time to be strategically invested in industrial real estate, which is the catalyst for supply chain logistics.

The biggest opportunity in commercial real estate?

Industrial. Industrial. Industrial. A couple things have presented themselves with the Coronavirus. First, the need for increased warehouse capacity. Look at the grocery stores. Look at the soft good stores. Look at all of the stores that are still open. It’s unlike anything anyone in the United States has seen before. Walking into a grocery store and seeing shelves empty. Produce is empty, toilet paper is out, cleaning product is out. These are household everyday goods, and an increase in warehouse capacity is necessary. I think you’re going to see a shift in construction with a continued increase in larger regional distribution centers. Take Los Angeles for example, where right now we have 1.5 million square foot developments under one roof that are ongoing. Take Amazon which has their 2.4 million square foot L+3 development with four 600,000 square foot floor plates under one roof. That’s going to continue to be a major driver for commercial real estate nationwide. Number two is beyond just those larger regional warehouses. Look at the amount of people that are home right now, which is basically the entire country. Yes, you’re going to the store to pick up a few things, but more than likely, you’re going to order online. And if you look at the amount of physical retail sales to all e-commerce and what that variation is, you can see that traditional retail (brick and mortar) was still representing roughly 85-90% of all sales. Even though that number has been decreasing, I think you’re going to see a much shorter gap in terms of ramp up period for online e-commerce to become much more readily prevalent and adopted by consumers, even though we’ve already seen exponential growth pre-coronavirus.

Key metrics when underwriting an Industrial asset

It depends on the property type that we’re looking at whether it’s distribution, manufacturing, specialty or multi tenant. If I’m looking at a multi-tenant building I’m asking: what’s my average suite size? What’s the construction type? How much power does it have? What’s the size of the roll up door? Is there a decent facade that we can either improve or expand upon? That’s what I’m looking for. Additional benefits would be things like, does it have a privatized yard? Is there extra parking? Do you have the ability to do a condo conversion on a property if you want to? Etc. If you’re looking at a distribution building: how many dock positions do you have? What’s the site coverage? What’s the clear height? How much office space is in the particular building? These are all the different types of metrics that we look at, and getting into what makes one better than the other is the secret sauce.

The future of multifamily, retail and office

Multifamily: There’s always going to be a need for multifamily. Affordability is a continuing ongoing factor within our country. There are plenty of folks in the millennial generation that have given up already on the idea of home ownership, or at least pushed it out for a very long time. There are also folks that are older and getting out of homeownership to put cash in the bank and live in an apartment for the rest of their lives. It’s a lifestyle change on a macro level, which is why you’re seeing so many more class-A apartments coming out of the ground. Retail/Office: Like most anything else, it’s really case by case. Strip centers, especially here in Southern California like the ones in the Valley and the South Bay, are fantastic investments. Your average suite size is 1,000 square feet. Even at $4-$6 dollars per square foot, retailers are going to be able to afford that if they’re offering a day to day service. However, things that can wait a day or two, or you can even get them on Amazon prime/fresh, you can get that in a matter of hours. Why go fight traffic? Why go fight for a parking spot? You’re going to see more people stay at home and have that distributed. Time has become more valuable because of affordability. People work longer hours, and they have to work harder. People are more focused on spending time working than they are on leisure. I’m curious to see what the actual numbers are, but I guarantee that the affordability factor is causing just that. Being smart, intelligent and proactive with your time is paramount. So if you can get any type of service while your still working, learning and growing, that’s going to be the future.  

Learn more about Mark Blumenthal.

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