Pandemic’s Impact on CRE Metrics Was What Everybody Expected

Just how much of an impact did the pandemic and resulting economic shutdown have on commercial real estate property performance? About what you would expect, according to a new report from Trepp. 

“Across the top five major property types and property subsectors, our findings on the magnitude of the impact of travel limitations, federally-imposed business closures and other social mitigation public health policies on CRE and CMBS in 2020 were generally in line with broader market expectations,” the report states. “On average, overall NOI, revenue, and occupancy behind CMBS loans contracted by 10.3%, 6.9%, and 5.3%, respectively, between 2019 and 2020.” 

Although all CRE sectors have arguably experienced some kind of long-term structural shift over the past year, CMBS delinquencies have remained modest for multifamily and office, the two property types that have been slower to show any signs of softening, Trepp says. However, drilling down into subsectors reveals a couple of pain points—again, along expected lines.

“It is worth highlighting that mid/high-rise apartments and urban offices behind CMBS loans logged the weakest NOI and occupancy growth last year, which adds more clout to the hypothesis that densely populated major metros were more heavily impacted due to the flight out of urban areas,” the report states. “As expected, the clear bright spot coming out of the coronavirus market crisis was the industrial sector, as the segment generated annual gains across every property subtype and metric analyzed.”

Conversely, hotels and brick-and-mortar retail experienced above-average declines in performance during 2020. “Consistent with the narratives surrounding the outsized disruption the pandemic had on lodging and retail, a more granular breakdown does indeed show that those two hardest-hit property types posted the largest annual declines for financial benchmarks across the board,” says Catherine Liu, associate research manager. 

In 2020, average NOI and occupancy for lodging loans fell by 70.5% and 35.6%, respectively, from the year prior. Full-service hotels, given their dependency on leisure and business travel, suffered the most severe financial damages far exceeding that of all other property subtypes. Extended stay accommodations, often considered a temporary housing alternative for displaced workers, fared better than all other hospitality sectors. 

In the retail space, on the other hand, recovery continues to be uneven across commercial retail spaces depending on the price point, location and type of goods sold. The pandemic has served to widen the gap between the “winners” and “losers,” the report says.

Average NOI and occupancy decreases were the most significant for superregional malls (16.8% decline in NOI and 5.2% drop in occupancy), regional malls (-13.0%; -4.1%), outlets (-14.7%; -7.2%), and urban/street retail (-15.9%; -3.8%). This wasn’t a surprise, Trepp says, given that COVID-19 had accelerated the shift towards e-commerce and amplified challenges for shopping malls, luxury retail, and department chains that had been struggling with sluggish sales for the past several years. 

However, the report notes that performance metrics of neighborhood centers, drugstores, community shopping centers, and other retail establishments focused on the sale of “essential goods” have held up well during COVID. “Since they comprise more than 70% of our retail sample set by loan count, this has helped to put a lid on overall percent declines in 2020 for that property type.”