UCLA Economist: Market Outlook Post-Coronavirus

April 27, 2020

The COVID-19 pandemic, which has touched every corner of the world and impacted every industry throughout the United States, has left an indelible mark on the economy. Greystone spoke with David Shulman, a senior economist with UCLA Anderson Forecast, part of the University's Anderson School of Management, about his predictions for how COVID-19 may change the commercial real estate landscape.

Q. What is the outlook for CRE in 2020-21? Are there some sectors that will perform better than others?

A. The multifamily sector is better off than property sectors such as retail and hotels. Probably the one sector that may be most impacted is senior housing. The industrial sector is good so far, and for offices there are long-run questions about how businesses will change their configurations or allow more people to work remotely.

The multifamily sector came into the year strong. Rents were going up and most owners were happy campers. The big risk they were facing was regulatory issues such as rent control. The pandemic has exacerbated that with things like the moratorium on evictions New York City's legislature is considering extending the moratorium for the entire year.

Q. How is the virus and the financial fallout from the shutdown economy expected to impact multifamily owners and managers?

A. In the near term, there will be pressure on apartment owners because of the wave of unemployment. But they will be OK if they are not overleveraged. Rents will be under pressure all year, but the industry was coming into the year in good shape. A one-year setback is not that big a deal because even if rents fall a little now, occupancy should stay strong.

One long-term outcome could be more regulations leaning towards tenants and away from landlords. We won't see a 'no evictions' policy forever, but we're likely to see it become much more difficult for landlords to evict tenants.

Q. What should multifamily owners do now to position themselves for a return to normal?

A. Apartment owners and managers need to figure out how to do digital marketing to attract new tenants. They also need to be hypersensitive about cleaning their buildings and letting people know they are doing it. The last thing anyone wants is a COVID-19 outbreak in their building, so they need to use special equipment to disinfect everything.

To keep their tenants, landlords need to be proactive about dealing with people. Maybe they can defer the rent or make a deal. It is better to get 50 percent of the rent for four months vs. none, especially if the tenants are unlikely to be able to pay their back rent after a few months.

Q. What lessons from previous crises can help apartment owners and investors?

A. This situation is so different that you really cannot take many lessons from previous crises. The great recession was more of a slow-motion train wreck that lasted for years. This is hitting a wall all at once.

After 9/11, I predicted that big companies would want their headquarters to be in a nondescript office in a suburban office park, but I was 100 percent wrong about that.

One question is where people will choose to live if they can work remotely. They may choose to work from Nashville or somewhere rather than an expensive coastal city.

The other question is whether people will want to move to the suburbs or to a smaller town. The big cities could be perceived as giant petri dishes for this virus. If that is what people are thinking, this could be better for investors in smaller midrise apartments in the suburbs. But that is a question for 2021 or 2022.

Q. Are there differences in expectations for mid-size multifamily owners compared to larger owners?

A. Smaller buildings and smaller investors are likely to be hit harder by unemployment because they may have fewer tenants who can pay rent. They will be especially hard hit if they are overleveraged.

In the higher-end luxury buildings, which tend to be owned by larger investors, most tenants paid their rent in April. The impact of unemployment is much worse on people with lower paying jobs and those are the people more likely to rent in smaller, more affordable buildings.

Q. What should developers anticipate about the availability of capital for investments?

A. There will be capital to invest. We are in a zero-rate world, so if you buy something at five percent, that is good. But the market needs to know what net operating income (NOI) will be in 2021. Once that is known, we will see lots more investment. The longer the economic shutdown goes on, the harder it will be to come back. If things start to return to normal this summer, we will see more investment faster. It may be that investor appetite will be greater for less urban areas and for cities other than gateway cities, but that is still a big unknown.