Q&A: Return to Opportunity for Commercial Real Estate
While the global pandemic continues to dramatically impact businesses, project managers and commercial real estate (CRE) professionals want to be able to predict whether their tenants will fall behind on payments. For our March 4 Market Pulse webinar, our panel of experts explored the implications for the commercial real estate market in 2021 and beyond.
This month’s presenters included Dr. Robert Wescott, founder and president at Keybridge; Carl Streck, CEO and co-founder at MountainSeed; Sarah Briscoe, senior statistical analyst at Equifax; and Bill Phelan, SVP and GM of Commercial at Equifax.
Participants answered audience members’ questions about the Tenant Risk Assessment, GDP growth, delinquency activity and more. Robert Wescott, Carl Streck, Sarah Briscoe and Bill Phelan answer those critical questions below. Watch a replay of our webinar, “Market Pulse: Return to Opportunity for Commercial Real Estate” or download a copy of the presentation. Jump ahead to a specific topic:
General Economy
Is there a chance that the 2020s in America after COVID could feel like the roaring 1920s of 100 years ago after the Spanish flu?
Dr. Robert Wescott: I've been reading some histories of the Spanish flu in that era. There really were a lot of similarities to the kind of thing that we are going through right now. People did come out wanting to spend. We did have inflation. So many of the conditions we had in the 1920s, we could have again. I think it is more likely we could have really strong growth the second half of 2021 into 2022. I think there's going to be some “revenge travel” in 2022 and 2023.
I think people are going to say, "I didn't get my vacation last year. I'm going to plan a really nice expensive vacation this year." I think we could begin to be like the roaring twenties, and we will see. For a decade, we have heard about secular stagnation where everything was shut down, and COVID has shaken things up. It probably is also bringing some new technology developments. We may have mRNA (messenger RNA) technology that may lead to a cancer cure. Who knows! We may have vaccines for cancer and other things. It could really be an exciting time for the American economy. I am generally optimistic, but I do not know that it is really going to be The Great Gatsby.
In the webinar, a base case GDP growth estimate of around 4% to 5% in 2021 was mentioned. But a few Wall Street firms are talking about 8% to 9% GDP growth this year. Is this even possible?
Dr. Robert Wescott: It is not impossible. I talked about $2 trillion of “dry powder” that people are sitting on. We really don't know. This is unprecedented that we have had a lockdown for a year and people have been sitting on bank accounts with plenty of money to spend. We do not know how rapidly that money is going to come out. Since Congress passed the $1.9 trillion stimulus package, putting that together with people wanting to spend a good chunk of that $2 trillion, you could expect a rip-roaring second half of 2021. You could have 7% and 8% or 9% GDP growth through the year. It is possible.
Is your index flattening due to the stimulus and renegotiation by banks to save off large charge-offs?
Sarah Briscoe: Likely, the stimulus plays a part. We are seeing big differences between industries in lending particularly. Construction and agriculture are doing well, while the other industries are largely seeing decreases.
Are you seeing consumer spending differences by state?
Dr. Robert Wescott: Yes, rural states are faring best, and urban states and cities worst. Credit card data shows 100% even levels of purchases year on year in rural states. Metropolitan areas with 100,000 to 250,000 population are like 98% year on year. Metropolitan areas with 250,000 to 500,000 like 97%, metropolitan areas with 500,000 to 1,000,000 like 96.6%, and metropolitan areas with over 1,000,000 population like 96%.
Cap Rate
What kind of cap rate do you see on vacation rental VRBO's in the traditional seasonal markets like the North Carolina Outer Banks vs. traditional hotels?
Carl Streck: Capitalization rates for hotels are difficult to pin down because the net operating income has been so badly impacted by COVID with occupancies very low. Many hotel buyers are looking more at price per square foot when purchasing. Most transactions for hotels right now are looking more at the recovery of net operating income and then assigning a cap rate to those. Currently, we are seeing those capitalization rates on stabilized (not current) NOI (net operating income) to be in the 7.5 range. Airbnbs are more difficult because many of the coastal areas are rental homes vs. large buildings. The capitalization rates on these investment properties is a bit higher, however it is difficult to pin down whether they are shorter (Airbnb, VRBO, etc.) vs. longer term rental. The taxes in many markets are substantially higher for short term rentals vs. long term rentals, which can also be the valuation.
What’s the outlook for multifamily?
Carl Streck: Based on our capitalization rate reporting for multifamilies, we have seen little if any change in the cap rates of multifamilies since last February. While some of this could be attributed to stimulus and the moratoriums on evictions, it appears like Multi-family housing should stay strong for the foreseeable future, particularly in the garden-style suburban markets with more affordable rents.
Commercial Real Estate
What sectors of construction seem to be the strongest? Residential or commercial real estate?
Sarah Briscoe: Right now residential is the strongest. In the webinar, Carl spoke about single family home construction. Recently, housing statistics are seeing much more than they have been. So those are on the up. Commercial real estate is struggling a little more, especially office buildings and that type of commercial real estate.
Does the Commercial Real Estate Tenant Risk Assessment product suite mentioned during the webinar provide a full view into all of the non-publicly traded franchise locations under different entities? Or is it by location or franchisor only?
Bill Phelan: We can do both actually. If you want to see it by building, that is what we have done. We basically matched up all the businesses by property and then overlaid property data, as Carl talked about. That gives you a full profile of the property itself. We can also pull back out of there and look at how those businesses are linked across different locations. Have it your way, whichever way you want it, but we can certainly accommodate both of those.
Will you be competing with firms such as Colliers for the CRE info market?
Carl Streck: No, in fact we see [competitors] to be consumers of the data that we curate because they have a direct benefit to seeing real time, accurate CRE information for appraisals, rental and sales brokerages, as well as capital markets. Transparency into the CRE market with accurate data is very important to these firms.
Delinquency Rates
Is forbearance part of the [SBDI] delinquency rates?
Sarah Briscoe: Yes, it is included to the extent that it is reported to us.
If forbearance is part of [SBDI] delinquency rates, then which bucket is it represented at? 30, 60, 90?
Sarah Briscoe: To clarify the statement that forbearance is included - generally loans in forbearance are reported to us as "current," but the balance simply does not decrement. We are considering loans in forbearance "current" (0 days past due) if they are reported to us. Thus, our 31-90 delinquency rates may be slightly understated based on the extent of forbearance across the country today. There has been minimal impact to the 91-180 SBD. If a business is severely delinquent (over 90 days past due), a lender is much less likely to offer some kind of forbearance or payment accommodations. Unlike consumer lending, there are few laws governing forbearance during the pandemic for business lending.
The rise in 91-180 day delinquencies for retail restaurants started to spike in late 2019. I assume that this is when these businesses are moving over into the 91-180 day category. What happened mid-year 2019 to cause this spike?
Sarah Briscoe: A combination of the US-China trade war increased labor costs, increased use of delivery services, and more caused reduced profitability and some increases in delinquency for Retail and Restaurant businesses in 2019.
Click here to watch the March Market Pulse webinar for more economic predictions and commercial real estate market trends. Access additional related insights and register for upcoming webinars on our Market Pulse web page. To learn more about our new Commercial Real Estate Tenant Risk Assessment product suite , contact your Equifax account executive today.
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