DSTs, Commercial Real Estate, & The Pandemic

December 10, 2020

As follow-on to our last blog, we will now discuss the effect the pandemic has had on commercial real estate.

Last Spring the pandemic threw commercial real estate into a tailspin.  Employees and their bosses abandoned offices to work from home and retailers shuttered their stores to slow the spread of coronavirus.

More than nine months have passed and both the office and retail sectors are still struggling to recover.  Cities have been particularly hard hit.  The greater the population density the greater the impact.

Recent surveys indicate that only 8% of workplaces in large metropolitan areas are expected to reopen before year end.  Another 35% have no timeline at all to reopen.

As such, downtown may no longer be the center of life as we have known it.  Offices have remained largely empty and many retail store fronts are still shuttered.  This economic malaise has been exacerbated in many places by civil unrest and attendant violence.

There has been a ripple out effect in the suburbs as well. With the more than a doubling of on-line retail transactions, shopping malls could lose more than half their anchor stores by the end of next year.

The retail sector was already under siege from online shopping pre-pandemic.  There is simply too much bricks and mortar retail for the digital age.  Covid-19 has put paid to this.

The same is true of the office sector.  With offices remaining relatively empty, many tenants have given back their keys.  Landlords could face dire consequences if they can’t fill up these vacancies.

With millions now working comfortably and efficiently from home, this is problematic.  Even with a vaccine, all these folks aren’t returning to their cubicles.  Many businesses will find that work can be done just as efficiently and more cheaply form home.

Like much of retail, office building owners may ultimately have to repurpose their properties to keep from losing them.  Many office buildings may tilt toward residential.  However, landlords may still take a significant hit because residential rents are lower than commercial rents.

To stabilize what remains of their tenant base in a post Covid-19 world retail and office property owners are negotiating all aspects of rent concessions, from rent reduction to rent forgiveness.  It is important for DST property investors to understand that lower rents may translate into lower prices at time of sale.

As mentioned previously, the multifamily sector isn’t immune either.  While occupancy levels have remained stable, this is in no small part due to past and present eviction moratoriums.  Unfortunately, this has created a significant back log of unpaid rent which risks a tidal wave of evictions in 2021.

This crisis may invite even more government regulatory intervention, which will come at the expense of rental housing owners.

On a positive note, both the self-storage and the senior living sectors have navigated this storm fairly well.  The reasons for this are obvious; self-storage properties don’t have tenants they just have tenants’ junk.  No people equals no virus.

Furthermore, the demand drivers for self-storage are; death, divorce, downsizing and dislocation.  The pandemic was a world class dislocation event.  With millions of workers and students going home for the duration, all their ‘stuff’ had to be stored somewhere.  This may not change soon.

Senior living benefits from the fact that the majority of tenants are no longer part of the workforce.  Therefore, their ability to pay rent is not contingent on a monthly paycheck.  As such, they are minimally impacted by recession or job loss.  With the aging of the population there is a certain inexorability to demand as well.

These factors and others contribute to self-storage and senior living’s number one and two ranking atop commercial real estate sectors in terms of total return;

*Total Return by Sector Self-Storage Senior Living

15 year average return ’04 – ’18 16.50% 14.80%

20 year average return ’99 – ’18 16.80% 14.20%

*Source: NCREIF (National Council of Real Estate Investment Fiduciaries)

Everything else (office, industrial, retail) is a long way behind.  As an investor, value of considering these property types should be clear.


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