By Lee Sherman
What goes up eventually must come down. Buy low, sell high. With these two adages in mind, investors in commercial real estate are looking for opportunities that are likely to arise as a result of the Covid-19 pandemic.
Even before the pandemic hit, economists warned of a coming recession. That led many to think about diversifying into commercial real estate. One of the biggest drivers was an increase in demand for corporate office space, a demand that fueled the rise of WeWork and many other co-working space companies as a result of a robust economy. That demand has all but fizzled out
Whether prices will fall even further is not in question. It’s only a matter of how much and when it will make the most sense to jump in. The restrictions on physical movement make building inspections, permit approval, construction, and moving almost impossible. While some adventurous soul may be willing to buy their next home without setting foot in it, this just isn’t an option when it comes to commercial real estate. No one is going to buy a commercial building on a Zoom call.
The market for borrowers is uncertain. There is still money to be lent but you’ll need to understand how prices are set, what discounts may become available now and in the near future, and how terms are set. Unfortunately, lenders take advantage of times like this in ways that make it harder to borrow. Lenders may require additional reserves to cover six to 12 months of mortgage payments or eliminating cash-out loans. Your best bet may be a line-of-credit.
Don’t Time the Market
Timing the market, any market, is difficult and not recommended. In the past, commercial real estate investors have made money investing in office buildings, shopping malls, hotels, and student housing. But, whereas only six months ago, these sectors seemed a solid bet, now, nearly all of them are risky at best. Until schools and businesses reopen and people start to travel again, they remain empty and empty buildings are like boat anchors that will drag your portfolio down. Liquidity is dependent on cash-flow and debt coverage but without paying tenants (shelter-in-place orders mean commercial tenants aren’t open for business and can’t pay their rents) your equity is also on lockdown.
Follow the Map
Geography will play a role in the recovery. As the pandemic has made its way from Asia to Europe and to North America, a pattern has emerged. The countries that have responded more quickly and decisively to Covid-19 with lockdowns, quarantines, contact tracing, and other restrictions, have also been the fastest to see something approaching a return to business, if not yet normalcy. Commercial real-estate markets are starting to rebound in Singapore, Australia, New Zealand and Hong Kong. However, keep in mind that just because restrictions may be eased, there will be a delay before people feel it is safe to travel. The hotels and resorts are likely to be empty for some time yet to come.
With a situation as complex and fluid as this, you should consider working with an experienced asset manager that can help you to protect your commercial real-estate investment.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.