Now that the world has changed, we should probably ask ourselves what the takeaway from the current pandemic may be in terms of commercial real estate generally and DST properties specifically.
Fortunately, it’s not all doom and gloom. Despite most national media outlets propensity for fear mongering (remember the old trope, if it bleeds it leads). April apartment rent collection was better than expected. However, May is still a concern.
Unemployment numbers have spiked. However, cash is flowing. Federal Pandemic Unemployment Compensation checks of $600 a week are arriving in mailboxes. Stimulus money is hitting banks for the purpose of small business loans, etc. Money is getting into people’s hands. It’s simply a question of priorities. Will that money go to rent and groceries or that new bass guitar? Time will tell.
This being said, most property managers are working hard to make it as easy as possible for tenants to pay their rent. Late fees are being waived. Some are discounting for early payment. Still others have put installment plans in place.
The portfolio nature of many DST apartment offerings may also mitigate rent collection issues. Despite the generalized nature of the pandemic, it is clearly more severe some places than others. It has had less impact so far in the Midwest and West than the East. Therefore, properties spread through these regions do not currently appear as challenged.
Interestingly enough, the self-storage sector seems to be benefitting from the pandemic. We have seen increased demand across many of our properties. This makes sense from the standpoint that the principal historical demand drivers for self-storage are: death, divorce, downsizing and dislocation.
The current pandemic is a generational dislocation event: Legions of students and workers have moved home. Much of their stuff is being stored for the duration.
Self-storage properties also benefit from the fact that much of the business (leasing, payment, security, etc.) is now done on-line. The day of the guard dog and on-site manager is largely done. With little personal interaction, viral risk is minimal.
Unfortunately, the same cannot be said for bricks and mortar retail. Pre Covid-19, much retail was going the way of dinosaurs: extinction. However, this is brought about not by an asteroid from outer space but the internet and Amazon. My fear is the “shelter in place” mandate will drive even more retail transactions on-line. Not all of this will return and there will be more dark spaces sans tenants. More empty space plus less demand equals lower property values.
Following close on the heels of bricks and mortar retail, is office. This sector was already under siege from telecommuting before the plague panic. Sadly, once we have turned the corner on it, I doubt all workers will return to their cubicles.
I think it’s possible that many businesses will find things can be done well and less expensively remotely. If this turns out to be the case, office footprints in the future may be smaller.
Through no fault of its own, senior living facilities are also under the gun. This virus hits people over 70 with preexisting pulmonary issues particularly hard. This is especially true when these folks aggregate in one place.
While the coronavirus struck senior care facilities with magnum force, some segments have fared better than others. The independent living sector appears the least affected. This makes sense from the standpoint that it’s essentially senior apartment living with a meal and entertainment plan. However, assisted living and nursing homes have not been as lucky.
With the population growing older, demand for senior care should continue to grow. However, operation of these facilities will change. Increased regulatory oversight will likely result from the present crisis. I will be surprised if more onsite medical staff and equipment are not required. Therefore, operational cost will likely increase.
All this being said, the fundamentals still apply. Well managed, investment grade commercial real estate is still an asset class worth considering.