CRE Investors: Funding Hurdles Will Be Too High for Some Asset Classes

One in four commercial real estate professionals believe some asset classes will no longer be eligible for funding as a result of the impacts of the COVID-19 pandemic, says Duff & Phelps after surveying 325 senior directors and investors globally. The finding suggests the economic effects of the pandemic may be too serious for some business models that rely on physical premises.

This in turn further raises concerns for the retail and hospitality sectors, which is where approximately 89% of respondents expect to see the worst long-term damage for commercial real estate.

Nearly half of U.S. investors (45%) expect commercial real estate assets will fall between 5-10% in value in 2020. That compares to 39% of investors worldwide who expect valuations to fall between this range. However, more than 90% of all respondents think transaction levels may start to move back to their pre-pandemic levels in 2021.

That being said, as estate investors begin looking elsewhere for assets that have proven to be more pandemic-resistant, 36% of respondents believe the industrial and logistics sector will emerge the strongest from the current crisis. This response correlates with the online retail shopping trend, increasing the need for larger distribution centers with better last-mile facilities.

“COVID-19 has affected the real estate industry profoundly as transaction activity is down and many industries are in outright stress,” says Ross Prindle, managing director and global head of the real estate advisory group at Duff & Phelps. “Retail properties that have reopened have seen mixed results with some in premium locales faring well and others in secondary locations doing poorly due to ongoing restrictions on capacity and lack of foot traffic.”

He added, “The bright spots have been logistics properties and, unsurprisingly, properties occupied by businesses deemed as essential. As we work to make it out on the other side of this pandemic, logistics warehouses will become an increasingly desired investment opportunity as the preferred retail shopping method accelerates from brick-and-mortar stores to e-commerce.”

With economic downturns already confirmed in major markets, respondents across the U.S. overwhelmingly believe the country’s economic recovery will be U-shaped rather than V-shaped. However, when asked about how the COVID-19 pandemic had impacted their own country’s GDP growth, nearly half of U.S. respondents (49%) optimistically saw damage to be minimal, between 1-5%, in contrast to those from Europe and the UK.

The current volatility notwithstanding, 78% of U.S. lenders and investors said they could deploy capital if the right valuation opportunity presented itself. Yet, that doesn’t come without strings attached: 45% of U.S. organizations surveyed would require a discount of more than 10% to gain internal approval to acquire an asset.

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