UBS: CRE Could Face Long Road to Recovery

According to the company's Real Estate Outlook report, all property sectors are susceptible to uncertainty.

The commercial real estate industry saw only the beginning of the coronavirus-related economic downturn in the first quarter, and recovery is expected to occur over the long term, according to a UBS report titled Real Estate Outlook—Global Edition 2, 2020

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As a result of widespread shutdowns across the U.S. in late March, commercial real estate statistics from the first quarter of 2020 look much like those from the fourth quarter of 2019 for most property types.

The apartment sector recorded a vacancy rate of 4.2 percent and an average rent growth of 2.7 percent, closely mimicking numbers seen in previous quarters. Looking ahead, the apartment sector is poised to remain strong.

“As an essential sector, apartments have the highest average rent collections of any major property type,” according to the report. Furthermore, with stay-at-home orders impacting development activity, healthy supply pipelines are in for a delay.

While the office sector—with a 12.3 percent increase in its vacancy rate due to 10 million square feet of new deliveries and slower new leasing activity—doesn’t rank alongside apartments as an essential sector, it does benefit from multi-year lease agreements. Still, the weeks following the close of the first quarter have yielded a drop in rent collections.

In the industrial sector, the first-quarter vacancy rate was 7.3 percent, and rent growth came in at 4.8. percent. As of late, although rent collections have gone on the downswing, industrial is experiencing relative stability. And while the coronavirus-induced skyrocketing of e-commerce persists, the industrial sector may experience a short-term dip in occupancy, as some users fail to accommodate the drastic shift in consumer demand.

Retail occupancy levels remained relatively steady at approximately 90 percent in the first quarter, but the second-quarter shuttering of nonessential destinations and the spike in demand for essential retail will likely result in highly conflicting outcomes not seen within other sectors.

“Grocers, pharmacies and essential services could see record first and second quarter sales,” according to the UBS report. “Once stores begin to open, lingering social distancing guidelines and an abundance of caution could restrict traditional brick-and-mortar retail and food service from achieving a needed recovery pop.”

The dollar signs

As the NCREIF-ODCE Fund Index indicates, private commercial real estate values declined slightly in the first quarter, a reflection of only the very beginnings of the pandemic’s impact. The 0.4 percent drop in values marked the first decline since the 2007-2008 global financial crisis. The hotel sector saw the most notable change with a quarter-over-quarter drop in value of 4.8 percent, followed by retail, which experienced a decline of 3.2 percent.

The all-property return decreased to 0.7 percent in the first quarter from 1.5 percent in the fourth quarter of 2019, according to NCREIF. “Divergent sector return performance became exaggerated over the quarter. Industries considered nonessential or those which rely on travel or congregation are suffering the most. Office, apartment and industrial have maintained a status quo, while retail and hotel returns have sharpened their decline,” as noted in the UBS report.

The equalizer

No region of the world has gone untouched by the coronavirus. In Asia-Pacific, the impact has been uneven across property markets so far, but as the original epicenter of the pandemic, the region will see its real estate sector take a more comprehensive hit if the situation lingers. In Europe, the remainder of 2020 will prove challenging, as lockdowns and travel restrictions take an extreme toll.

“COVID-19 is affecting all real estate markets globally. Recession will hit occupier demand, with the retail sector being worst affected and logistics most resilient,” according to the UBS report. “Ultimately, recovery will depend upon how quickly the health crisis is brought under control, with a vaccine likely needed for a full exit.”