Changing Trends in Response to COVID-19

During the past few months, commercial real estate investment volume has dropped approximately 30 percent. This has made deal-making more difficult for both brokers and investors. Today, we will dive into a few of the trends that are reshaping the commercial real estate industry and how investors and brokers can capitalize on these changing dynamics.

Investors Search for Property Bargains

It is unsurprising to find that the value of commercial real estate assets has declined in recent months. This is a direct result of falling occupancy and rental rates. However, many investors are taking this economic downturn as an opportunity to acquire distressed properties. A distressed sale can include the following: auctions, foreclosures, bank-owned sales, short sales and deed in lieu of foreclosure transfers.

According to CoStar data, distressed property sales have surpassed that of traditional hotel and retail properties—two of the sectors hit hardest by the coronavirus pandemic. In June, distressed retail sales were at 2.2 percent, and distressed sales made up 4.4 percent of all hotel sales. What does this mean? Right now, investors are shifting their focus away from core assets in anticipation of future repricing opportunities.

E-Commerce Effects on Commercial Real Estate

E-commerce has gained in popularity over the past decade. Current e-commerce retail penetration rates have grown to 20 percent. This number is expected to increase significantly due to the COVID-19 pandemic and its lasting effects on the worldwide economy and consumer shopping habits. How will the commercial real estate landscape adjust to this “new normal?”

As consumers visit brick-and-mortar stores on a less frequent basis, lower-quality, struggling assets—like aging enclosed shopping malls—will either shutter or be repurposed into mixed-use developments. Restaurants, quick-service restaurants (QSR) and fast food retailers with drive-thru service will remain essential, but their reliance on delivery and takeout platforms will increase. Delivery platforms will also be critical to companies like Whole Foods and other grocery store chains. Experiential spaces—like movie theaters, gyms, fitness studios and even casinos—will also be affected as individuals consume more at-home solutions like Netflix, YouTube and Peloton.

Retailers React to COVID-19

While many retailers have begun to liquidate assets, close storefronts and file for bankruptcy protection, others have managed to meet these challenging times with new, innovative ideas. For instance, Walgreens Boots Alliance (the parent company of Walgreens) has partnered with VillageMD to introduce full-service doctor offices co-located in stores within more than 30 U.S. markets. This news comes as retail giant Walmart unveiled its plan to open freestanding Walmart Health Facilities and CVS Health begins to expand its HealthHub store format.

Ground + Space is Here to Help

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The IRS 1031 tax deadline is less that one week away, so please contact one of our brokers for specialized guidance during this time.

Stay Safe and Informed

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


Shopping Centers Face an Uncertain Future

Traditional shopping centers are facing uncertain futures as the COVID-19 pandemic continues to negatively impact store occupancy and vacancy rates. The first three months of 2020 marked the first time in over a decade that retail property writ large had a negative net absorption. What does that mean? Simply put, negative net absorption results when more tenant space is empty than filling up. The resultant change in the number of occupied square feet in shopping centers has resulted in a negative downturn for the first two quarters of 2020.

What’s causing this change?

The COVID-19 pandemic required all but the most essential retailers—like pharmacies and grocery stores—to close their doors for nearly three months. This dramatic shift has seemingly sped up the process of transformation already underway in the retail and commercial real estate industries. In response to the myriad challenges brought on by the novel coronavirus, retailers have made major changes.

Some retailers have chosen to dramatically reduce the size of their real estate footprints by closing stores, while others have begun bankruptcy filings. All of these changes have left landlords struggling to lease vacant spaces in shopping centers and traditional enclosed malls that would normally be filled with department stores and other well-known retail brands.

What does this change mean for commercial real estate?

The net absorption rate is a good way to judge the strength of supply and demand in the various sectors of the commercial real estate market. When the net absorption rate is positive, demand for space is high, rental rates are competitive and property values tend to increase. However, when the net absorption rate reverses course, vacancy rates increase and rental rates slowly begin to decline.

The effect of vacancies on rental rates and leasing will inevitably vary from market to market as the year comes to a close. Any market that depends on both international and domestic tourists will be slow to return to pre-coronavirus levels of retail activity. Large, urban markets are likely to fare better, as well as smaller emerging markets like Raleigh, North Carolina and Austin, Texas.

Is there any good news?

Single-tenant net lease (STNL) assets are still in demand for investors, especially those in 1031 exchanges hoping to take advantage of the looming IRS deadline on July 15. Investors seeking a sense of safety in a still uncertain economy are pursuing listings that feature a single-tenant property leased to a tenant that offers an essential service. Fast food and quick-service restaurants (QSR) with credit rated tenants are also in demand.

Ground + Space has several assets on the market right now that would be an ideal investment for any investor. Our CVS Pharmacy listing features a NN corporate-guaranteed lease that was recently extended by 20 years. The Tire Choice property that is currently available is situated within a dense retail corridor in The Villages, Florida and boasts a NNN lease.

How can Ground + Space help?

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The IRS 1031 tax deadline is fast approaching, so please contact one of our brokers for specialized guidance during this time.

How can I stay informed?

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


Loan Relief and Delinquency in the Days of COVID-19

The effects of COVID-19 are being felt by lenders hoping to collect loan payments as government relief programs near their expiration dates. Lenders began allowing borrowers postpone billions of dollars in loan payments back in March. Many lenders adopted this practice at the request of government regulators and lawmakers who placed moratoriums on both foreclosures and evictions. As forbearance requests from government-controlled mortgage finance companies end, the mounting number of distressed loans is expected to grow.

Loan Delinquency Rates on the Rise

In mid-June, bond rating agencies reported the greatest month-to-month increase in commercial mortgage-backed security (CMBS) loan delinquencies in at least three years. The CMBS loan delinquency currently totals around $36 billion. That number is five times higher than it was before the coronavirus pandemic began sweeping through major metropolitan markets in February.

The Kroll Bond Rating Agency (KBRA) reported another $60 billion on servicers’ watchlists. These loans include those that have experienced the loss of a major tenant and loans that have near-term maturity dates on which borrowers may not have the option of refinancing. On the commercial real estate front, Fitch Ratings recently released current and April delinquency rates. Except for multi-family, all other commercial property types have seen an increase in delinquency rates. Retail property delinquency rates have increased by 3.82 percent, and mixed-use property delinquency rates have increased by just under one percent.

What Happens Next?

The effects of the massive coronavirus relief measures are expected to create operational challenges for banks. According to Fitch Ratings, the asset quality for many U.S. banks is expected to deteriorate as a result of the COVID-19 pandemic. However, it will likely take a few quarters before the true impact to materialize on bank financial statements.

The economy’s overall recovery—and the ability for borrowers to make timely loan payments—will depend on the ability of states to adequately contain COVID-19. A number of states that opted to “open early” are now seeing an increase in the number of coronavirus cases as a result of community spread. These states remained mostly unaffected during the so-called “first wave” of COVID-19. As the number of active cases begins to decline in areas like New York City, COVID-19 infections are on the rise in states like Florida, Arizona, California and the Carolinas.

Navigating These Uncertain Times

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The IRS 1031 tax deadline is fast approaching, so please contact one of our brokers for specialized guidance during this time.

Stay Healthy and Safe

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


The Federal Reserve’s New Economic Outlook

Early last week, the Federal Reserve held its Federal Open Markets Committee (FOMC) policy session. At this meeting, Chairman Jerome H. Powell and the other committee members debated the FOMC’s next moves for supporting the economy moving into the latter part of 2020.

New Economic Projections

As part of last week’s meeting, the Federal Reserve released revised economic projections for the remainder of the 2020 fiscal year. This set of projections are the first to be released since December 2019. At the end of last year, policymakers anticipated a two percent growth in gross domestic product (GDP) and a low unemployment rate of 3.5 percent. The updated projections show a GDP decline of 5.6 percent and a 9.3 percent unemployment rate. (The latest forecast from the bipartisan Congressional Budget Office shows similar figures.)

By the end of 2020, the Federal Reserve expects the economy to resemble what it was circa 2009. (For context, the country was, at that time, in the midst of what is now known colloquially as “The Great Recession.”) With that fact in mind, it comes as no surprise that FOMC Chairman Jerome H. Powell said the following in a post-meeting press conference: “We’re not thinking about raising rates.”

The U.S. Economy Is in a Recession

The National Bureau of Economic Research (NBER) recently announced that the United States entered a recession as of February 2020. This marks the end of an economic expansion that lasted for 128 months. The length of the current recession will be determined by several factors, including domestic production and rates of employment.

Although more people have either gone back to work or have found new employment opportunities as states have begun to reopen, employment rates continue to remain high. This, plus the patchwork approach to reopening and a sharp decline in demand, has led to a promise from the Federal Reserve to not raise interest rates, at least for the time being.

New and Expanding Programs

In the face of the COVID-19 pandemic, the country’s central bank has worked to reactivate and expand emergency programs that were put in place during The Great Recession. The Federal Reserve implemented liquidity programs back in March, which flooded the country’s financial system with around $3 trillion. While this did lead to some improvement in market conditions, the Federal Reserve has had trouble setting up its two new credit programs: the Main Street Lending Program and the Municipal Liquidity Facility.

The Main Street Lending Program was created to provide credit to mid-sized businesses that are considered “too large” to receive government-backed small business loans. The program was established with approximately $75 billion in equity provided by both the Treasury Department and the CARES Act. On June 15, the Federal Reserve announced a proposal that would expand its current Main Street Lending Program to include nonprofit organizations.

Navigating These Uncertain Times

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. In these uncertain times, there is still a high demand for income-producing assets leased to credit-rated tenants. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The market changes daily, so please contact one of our brokers for specialized guidance during this time.

Stay Healthy and Safe

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


Retail Closures and Other STNL News

Many retailers that found themselves struggling in a pre-coronavirus world dominated by increased e-commerce adoption rates have begun to restructure their business models or close their doors for good. Current research shows that between 20,000 and 25,000 storefronts are expected to shutter forever by the end of 2020. This is a dramatic increase compared to the 9,300 store closures reported in 2019. At least 15 major retailers have filed for some form of bankruptcy protection.

What retailers are closing their doors and filing for bankruptcy? Are any retailers expanding their footprints amidst the nationwide pandemic? Let’s take a look.

Store Closures and Bankruptcies

As of early June, at least 4,000 storefronts are in the processing of closing. More than half of those can be accounted for by six major retailers, including: Pier 1, Tuesday Morning, GNC and JCPenney. Other retailers that have either filed for bankruptcy or announced store closures include: Papyrus, CMX Cinemas, Starbucks, Victoria’s Secret, J.Crew, Neiman Marcus, Macy’s, Payless, Dress Barn and Gymboree.

Pier 1 filed for bankruptcy in early February. Three months later, the company is ceasing all its retail operations and expects to close all of its remaining stores by October 2020. The company is currently working to liquidate the remainder of its assets. Discount home goods retailer Tuesday Morning joined Pier 1 in filing for bankruptcy in late May. The Dallas-based chain will permanently close at least 230 of its nearly 700 stores in the United States this summer. During the Chapter 11 bankruptcy process, the retailer hopes to renegotiate many of its leases so it can focus on improving product offerings in its remaining high-performing stores.

The health and nutrition chain GNC will close at least 900 of its retail locations by the end of 2020. CEO Ken Martindale pointed to decreasing mall traffic as one of the many reasons the company has decided to significantly reduce its footprint. GNC plans to reduce its mall count by nearly half. (Currently, mall locations make up about 23 percent of GNC’s retail footprint.) Another former mall staple—the 118-year-old company JCPenney—filed for bankruptcy in early May. The coronavirus pandemic had a dramatic effect on the department store chain, resulting in major decreases in store sales. The company hopes to continue doing business even while closing a at least 154 of its remaining 846 stores.

Some Good News

Although few retailers are focusing on expansion plans during the midst of this nationwide pandemic, some notable brands—most in the quick-service restaurant (QSR) sector—are hiring more workers. Fast-food chain Dunkin’ announced its plan to hire at least 25,000 new employees nationwide. Taco Bell made a similar announcement in late May as it unveiled its plan to hire 30,000 workers this summer.

Because of the relative strength of QSR assets, they are at the top of investors’ lists as many in 1031 exchanges prepare for the July 15 IRS tax deadline. Single-tenant, net leased assets are still trading even as investments in department stores, strip centers and other non-essential retailers have been put on hold. Retail assets valued between $1 million and $5 million that feature essential tenants like Dollar General, McDonald’s, 7-Eleven and Wawa are doing well, although they are being sold at higher cap rates.

Navigating These Uncertain Times

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The market changes daily, so please contact one of our brokers for specialized guidance during this time.

Stay Healthy and Safe

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


Pandemic Reshapes Commercial Real Estate Market

Since March, the COVID-19 pandemic has caused dramatic changes in the way individuals do business and buy goods. These changes have not only affected the retail sector—every aspect of the United States economy has been impacted in some way. Here we take a look at some of these changes and how they will influence the future of the commercial real estate market.

Physical Versus Economic Vacancies

Retailers deemed nonessential during the COVID-19 pandemic are facing a dramatically different economic outlook than their essential retail counterparts. Experiential businesses, buffet-style restaurants and retailers facing financial hardships before the pandemic began currently face an uncertain future. Although many businesses have begun opening their doors as nationwide restrictions have been partially lifted, some retailers might be forced to close their doors for good.

Higher vacancy rates are expected as a number of retailers reassess their position in the marketplace. Although more and more storefronts have shuttered, a number of leases still remain in effect. This, in turn, has expanded the gap between physical and economic vacancy. According to some reports, the average physical vacancy rate will jump to between 5.6 and 6.8 percent by the final quarter of 2020. The economic vacancy rates are expected to be even higher as retailers grapple with new regulations, depleting cash reserves and lack of financial assistance.

Construction Projects Slow and Rent Prices Fall

As a result of the pandemic, developers and retailers are slowing down the rate of construction and expansion projects. Completed projects during the first three months of 2020 dropped to just 8.3 million square feet. Inventory additions are expected to decrease to levels not seen since 2000 by the end of the year. Although some projects have been cancelled altogether, many others have simply been put on hold and are expected to resume in 2021. There is a silver lining, however: Single-tenant net lease (STNL) properties will account for the largest portion of this year’s construction projects at nearly 17 million square feet.

Less new available space and rising vacancy rates will have a negative effect on asking rent prices for commercial real estate assets. During the first quarter of 2020, asking rent climbed to an average of $20.50 per square foot. Some experts believe asking rent prices will fall as much as 9.4 percent by December 2020.

STNL Assets Are Still Going Strong

Long-term security is just one of the reasons investors are targeting STNL assets now more than ever. Discount retailers like Dollar General and Dollar Tree have attracted a wide range of investment offers, along with other essential retailers like CVS Pharmacy. Quick-service restaurants (QSR) with drive-thru service windows are also being targeted as these retailers have generated near pre-pandemic sales. For now, buyers are less interested in fitness centers, department stores, sit-down restaurants and strip centers with a number of nonessential tenants.

Navigating These Uncertain Times

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The market changes daily, so please contact one of our brokers for specialized guidance during this time.

Stay Healthy and Safe

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


The Coronavirus Pandemic Reshapes Retail

As many states look to reopen portions of their economies in the coming weeks and months, the team at Ground + Space are diligently tracking the effects of the novel coronavirus (COVID-19) on the commercial real estate industry across various sectors. Although the idea of returning to work is a welcome one in this uncertain economic climate, it’s important to acknowledge that companies will return slowly to an environment forever changed by this virus.

Post-Pandemic Outlook

According to reporting by the Swiss money manager UBS, the retail industry in the United States is heading towards a major shift. Current estimates show that the country stands to lose anywhere between 11 percent to 17 percent of its total store count by the year 2025. (This estimate is based on projections that e-commerce penetration will rise to 25 percent by 2026.)

Companies and retailers that already boast strong online operations and logistics networks—like Amazon, Walmart and Target—have continued to thrive during this pandemic as more and more consumers shop online. These powerhouse retailers are poised to take over market shares left behind as brick-and-mortar retailers close their doors.

The Continued Rise of E-Commerce

E-commerce sales have steadily risen over the past decade. As of the third quarter of 2018, e-commerce sales reached approximately 16 percent of total retail sales in the United States. This trend of rising e-commerce sales has accelerated considerably in response to the global coronavirus pandemic. Stay-at-home orders across the country that have stopped all non-essential business. These conditions have forced retailers both large and small to quickly adopt online marketplace platforms to service customers.

As households across the country make the shift to more online spending, struggling retailers will be forced to either pivot towards an omnichannel approach or rationalize their store counts and future brick-and-mortar expansion plans. Retailers like Macy’s, Inc. and JCPenney Company, Inc. have already made plans to close stores, and other vulnerable retailers are likely to do the same throughout the remainder of 2020.

COVID-19 Impact Across Retail Sectors

Each segment of the retail market landscape is feeling the effects of COVID-19 in different ways. If the UBS estimates are indeed correct, the loss of stores and revenue will be most pronounced in the following sectors: apparel and accessories; consumer electronics; and home furnishings. Because retailers like these make up a large portion of tenant rosters in enclosed shopping malls, many struggling regional shopping centers are expected to close. The retailers expected to weather the storm include essential businesses that are allowed to remain open during the global pandemic, as well as non-essential retailers like home improvement stores and automotive parts stores. Ground + Space has several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy.

Stay Informed

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.

How can Ground + Space help?

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. Our team is committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The market changes daily, so please contact one of our brokers for specialized guidance during this time.


COVID-19 Impact on CRE

As the nation works to combat the effects of COVID-19 (the novel coronavirus), there does appear to be some relief in sight for those with commercial real estate investments. In early April, the Internal Revenue Service (IRS) released extended guidance on its earlier decision to extend the country’s tax payment deadline to July 15, 2020. This additional guidance will allow individuals in 1031 exchanges extra time to do identify a replacement property.

What is a 1031 exchange?

Simply put, a 1031 exchange allows investors of commercial property to transfer ownership from one space to another without having to pay taxes. This vehicle for investment allows investors to make real capital gains on their commercial real estate property via exchanging properties that increase in value over time.

How is COVID-19 impacting 1031 exchanges?

Under the new IRS guidance, investors now have more time to both identify and acquire replacement properties within a 1031 exchange. Previously, an investor had 45 days to complete the identification and acquisition processes. The new deadline guidance is as follows:nIf the identification deadline falls between April 1, 2020 and July 15, 2020, the new deadline is July 15, 2020. Likewise, if the 180-day purchase deadline falls between April 1, 2020 and July 15, 2020, the new deadline is July 15, 2020.

The altered guidance will impact both investors and brokers working through the 1031 exchange process. The deadline extensions will help investors avoid some of the immediate impacts of the various shelter-in-place orders. Likewise, there is not as much pressure on investors to identify properties that will close quickly, as opposed to properties that meet specific investment goals.

How can Ground + Space help?

The team at Ground + Space remain committed to providing best-in-class services to our clients during the COVID-19 pandemic and beyond. For more information and customized guidance on how you can leverage your investment for tax incentives, please reach out to Michael Zimmerman and Brett Sheldon.

Are you in a 1031 exchange or interested in maximizing your return on a commercial real estate investment? Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. Contact one of our team members today to find out more about our current listings. Also, you can sign up for our mailing list to stay updated on all we have to offer.