Get Inside Access
The lockdowns has turned the world of CRE upside down. Nearly every sector has been disrupted (or stimulated, in the case of industrial) by the pandemic’s far-reaching effects.
New trends are being put into place, consumer demands took a 90-degree turn, and new approaches to business are coming into the light. Everyone’s wondering what exactly is going to come next – and what that will mean for the commercial industry as a whole.
Retail in a Post-Lockdown World
We’re seeing this come into play through the retail arena – one of CRE’s most turbulent sectors for the past few years, thanks to e-commerce related challenges. The industry has been mourning the fall-out-of-favor of the classic American shopping mall and has long been searching for a high-traffic replacement.
And, surprisingly, it may have been found in a place no one ever expected to look….
While only time will tell, the open-air, grocery anchored shopping center may thrive in the post-pandemic market. Here’s a look at why:
Socially Distant and Safe
The most appealing part of this specific shopping center is the outdoor quality. In a time where social-distancing concerns are at a high point, there’s no better way to quell the anxiety than with constant fresh air.
Outdoor malls take the anxiety out of going into public places because air isn’t stagnant, germs aren’t settling, and movement is everywhere. While personal protective equipment, such as masks and gloves, are still needed, the outdoor element puts some much-needed space between visitors.
Essentials Only, Please
The second element of the open-air grocery anchored shopping center is that it’s rooted in an essential business. Grocery stores thrived throughout the pandemic, where demand constantly outweighed the supply.
Having the shopping center rooted in a promising business is key for staying afloat in the post-COVID world. While other types of retail and small businesses couldn’t keep up their momentum, the grocery store reigned supreme.
Because of their super-hero efforts, grocers proved themselves to be worth the public’s trust. A recent survey shows that 54% of shoppers said they feel safest from COVID-19 when shopping in grocery stores. At a time when consumer trust isn’t easily gained, this is the most valuable business-boosting asset – and the grocery store legacy has it.
Falling in Favor with Investors
Property owners and investors will be looking for exactly this kind of asset – one that is sure to stay strong during even the worst of times, yields massive returns consistently, and is deemed an essential business during closures.
As talks of a potential second wave of lockdowns come in the autumn season, everyone is trying to get their assets in line to be prepared for anything. If the first wave taught the business world anything, it’s to prepare for the worst, hope for the best, and wait it out.
Could this be the next best thing to happen to CRE’s retail industry? It certainly may be.
It’s all still too soon to truly tell, but this shopping center seems to hold immense value for brick-and-mortar retail real estate investors.
Stephen M. Spaeder, SVP of Acquisitions and Development at Equus Partners – a real investment and development firm located in Newtown Square, has an article in the Philadelphia Business Journal, Viewpoint: Confluence of recent events is likely to accelerate urban withdrawal, looking at whether we will see a drop in demand for real estate in Philadelphia‘s Central Business District (CBD) and an increase demand for real estate in the Philadelphia suburbs and in business friendly states?
Mr. Spaeder points to both the recent lock down and protests, as factors which would speed up which many have already been predicting. A number of real estate investors have pointed out the demographic trend of aging Millennials which could lead to an increased desire for homes outside the city. This trend along with the recent lock downs could lead to an increased demand for commercial real estate in the outer suburbs.
Some interesting points Mr. Spaeder made in the article:
An article on the California housing market could potentially hold some insights from real estate investors in the Philadelphia area. One question coming out of the current market conditions, is whether we will see a boom in demand for real estate outside metro areas. David Benda for the Record Spotlight has an interesting interview with the economist from the California Association of Realtors
Jordan Levine, deputy chief economist with the California Association of Realtors, told the Record Searchlight in April the medium- to long-term real estate recovery from the coronavirus pandemic could favor rural communities over larger metropolitan areas.
This content is being provided for free as a public service to our readers during the coronavirus outbreak. Please support local journalism by subscribing to the Record Searchlight/Redding.com.
“And you have those markets where housing is more affordable, but overlay on top of that that businesses are realizing production can be maintained with a remote workforce,” Levine said.
It could come down to a quality-of-life issue for working families.
“Having the option to not have a commute of an hour or two versus home ownership where homes are more affordable could well benefit rural areas,” Levine said.
There is an interesting article on Bloomberg, Automated Grocery Warehouses Could Be the Future for Strip Malls, which has some interesting analysis for owners and investors in strip malls and older retail centers. The article highlights some commercial real estate industry analyst who think there could be a potential for strip mall owners to utilize vacant space as fulfillment centers for grocery stores or other companies looking for direct to consumer channels.
Strip mall landlords should consider building automated warehouses for grocery store tenants to capitalize on the newfound demand for online delivery brought on by the coronavirus pandemic, BTIG LLC said in a note Monday.
Analysts Michael Gorman and James Sullivan said real estate investment trusts that own shopping centers should consider adding “microfulfillment centers” (MFCs) to food markets already on their properties. The analysts said those facilities can cut down the time it takes to fulfill an online order to five minutes from one hour and enhance productivity in a number of other ways.
“Developing cutting edge microfulfillment centers in their properties could fix critical gaps in online grocery fulfillment, increase store productivity and make REIT shopping centers even more critical real estate,” Gorman and Sullivan wrote. “We think that REITs with good properties, good grocery tenants, and strong balance sheets should be defensive and generate above-average growth.”
While many real estate analyst see retail property owners and investors having a hard time, looking into utilizing older vacant retail space for direct to consumer operations, could be an interesting option and definitely something to keep an eye on.
One of the biggest changes to real estate investing which could come out of Covid-19 is opportunities around office buildings. While we see warehouses as an excellent opportunity for real estate investing, one area which could offer significant risk but potential upside is office buildings.
As recent news has shown, more and more companies are looking at moving to a higher percent of their workforce being remote. This trend became increasingly apparent as Nationwide made news when it announced it was moving out of a number of its office buildings.
A recent press release from Nationwide outlined their plan:
Nationwide announced today a plan to permanently transition to a hybrid operating model that comprises primarily working-from-office in four main corporate campuses and working-from-home in most other locations.
“We’ve been investing in our technological capabilities for years, and those investments really paid off when we needed to transition quickly to a 98 percent work-from-home model,” said Nationwide CEO Kirt Walker. “Our associates and our technology team have proven to us that we can serve our members and partners with extraordinary care with a large portion of our team working from home.”
The company plans to exit most buildings outside of the four designated campuses by November 1, 2020 and move associates in these locations to permanent remote-working status. Those locations include:
• Gainesville, Fla.
• Harleysville, Penn.
• Raleigh, N.C.
• Wausau, Wis.
• Richmond, Va.
When you start to see Fortune 100 companies like Nationwide begin moving to increased remote work it’s a trend to pay a lot of attention to. Being the first to begin to dump fixed costs like real estate and utilities could permit Nationwide to undercut other carriers on premiums, allowing them to potentially grow their market share.
It’s not too far to think other companies which have successfully navigated the remote work model, will begin to follow Nationwide’s lead.
This could be an opportunity for value-add real estate investors to repurpose older office buildings. We could also potentially see a move from large urban office buildings to suburban mid-rise office buildings or office parks.
With the Coronavirus making many real estate markets less accessible to investors, it is a great time to review your processes and improve your real estate investing business. Mike Hambright, Founder of Flipnerd.com, has some excellent suggestions on a recent Forbes Real Estate Council article. Below are a few of his suggestions, worth considering.
While there are always challenges to real estate investing, it is important to realize those who continue to prepare and work hard will be rewarded as markets get back to a more normal state.
With a lot of negative news around real estate, it’s interesting to see what areas could benefit from the easing of restrictions over the coming weeks and months.
At least one commercial real estate executive thinks, some malls could see a rebound. Jeff Olin, president and CEO of Vision Capital Corporation was interviewed by InvestmentExecutive.com mentioned, Shopping malls continue to face “long-term pressures,” Olin noted, although he thinks the best malls will recover after the pandemic, when people suffering from cabin fever are allowed to venture out in search of retail therapy.
Olin also noted the malls which will likely do the best long-term are those with the options to look towards alternative uses, “The best [mall] locations, where you can provide alternative uses with apartments and office space and other creative uses, will continue to do relatively better,” Olin said.”
As we see more issues facing companies like WeWork, will savvy real estate investors find opportunity in good mall locations which could be updated to include co-working spaces or even the addition of residential.
Just came across an interesting article in Forbes by Regina Cole, Now Is A Great Time To Invest In Real Estate, which highlights how we could see a return to cash real estate investors using, “Subject To” deals. The article highlights some thoughts by Clint Coons an attorney who sees,
“Coons believes that an excellent way to monetize the current real estate landscape is with “Subject To” investments. “Subject to” investing is a method of purchasing property that leaves the seller’s loan in place. In essence, it allows the buyer to purchase real estate without getting new financing for the property – he or she is buying real estate that is “subject to” the existing debt.”
I think the best point of the article is that real estate investors who are currently able to purchase properties for cash will have a lot of options and be able to use some creative terms. It could definitely be an interesting quarter for cash real estate investors.
We reprinted the FAQ document on Opportunity Zones, so you don’t have to go to the Treasury site and download them. Looks like a continued great opportunity for real estate investors.
Final Regulations on Opportunity Zones:
Frequently Asked Questions
After considering over 300 formal comment letters and additional taxpayer feedback, the Treasury Department and IRS have issued final regulations on Opportunity Zones to provide clarity and certainty for investors and communities.
The questions and answers below describe changes made to the proposed regulations that are reflected in the final regulations in response to engagement with the public.
What types of gains may be invested and when?
When may gains be excluded from tax after an investment is held for a 10-year period?
How does a Fund determine levels of new investment in a Qualified Opportunity Zone?
How can large C Corporations invest in Opportunity Zones?
The HUD Release stated:
Beginning December 16, homebuyers seeking to purchase a home in a qualified Opportunity Zone can use the Limited 203(k) program to finance rehabilitation costs up to $50,000 into the total mortgage amount.
This is an increase of $15,000 over the Limited 203(k) rehab maximum amount of $35,000 allowed through the program on single family homes not located in Opportunity Zones.
Existing homeowners with homes in Opportunity Zones can also use the larger allowable rehabilitation amount when refinancing to rehabilitate their existing homes.
“Providing this opportunity means that the families seeking affordable homeownership or to improve their homes in distressed neighborhoods – where rehabilitation is needed the most – have a path to financing that makes it realistic to do the repairs and improvements that will uplift the entire community,” said HUD Secretary Ben Carson.
FHA’s Limited 203(k) program permits homebuyers and homeowners to finance rehabilitation costs into their mortgage to repair, improve, or upgrade their home, allowing them to tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or an appraiser.
Allowable improvements include connecting to public water and sewage systems, repairing or replacing plumbing, heating, air conditioning or electrical systems, and covering lead-based paint stabilization costs.