Working Capital The Real Estate Podcast

Is Commercial Real Estate in Trouble? | Just Ask Jesse

May 25, 2021

In This Episode

In this week’s Just Ask Jesse I discuss my thoughts on the future of commercial real estate.  The last 18 months has impacted various businesses and as a result CRE as a whole.  I give my two cents on changes I see in retail, office, industrial and multifamily.  

To ask a question feel free to email me:  jessefragale@gmail.com

 

Transcript

Jesse (0s): All right. Welcome to working capital the real

Jesse(3s): Estate podcast. I thought we would do another, ask me anything or ask Jesse. Yeah, it’s too early. Don’t know what we’re calling these, but basically it’s a chance for anybody to ask me a question as it relates to real estate. And the one I got today was, is commercial real estate in trouble. And just to kind of frame this question, just because it seems to be something that’s in the news quite a bit. And as we all know, there are various different asset classes as it comes to, as it relates to real estate, excuse me.

And there are different localities and geographies and real estate ultimately is a local place. So to try to frame the conversation, I thought we would start with thinking about the different areas in real estate. As many of, you know, you know, we have multifamily multi-residential office space, industrial and retail, and those could get, you know, sub-categorized even deeper for multi multi-family. It could be manufacturing, housing, and, and even further into different segments in office.

It would be, you know, think flex working traditional office and different ways of working on the industrial side. It could be fulfillment centers, warehouses automotive, and more. And then on retail, it could be storefront. It could be malls, it could be hoteling. So I think we need to take a look at these individual areas in kind of UN way to have a look at what we think is going to be happening over the longterm. And I think ultimately if we take it from the top as to the most effected to the least effected, I would definitely say without question, retail has taken the brunt of the lockdown, the pandemic, it’s just the nature of their business that they have been hurt the most.

And the reality is that some of these were long, longer term structural changes that were going to happen regardless of COVID, but they’ve definitely been shoved into overdrive to a certain extent as a result. So we have seen various types of enclosed malls, which have been hit particularly hard and street retailers in downtown cores in north America, whether you’re in New York or you were in Toronto, you’re in Montreal or you’re in San Francisco. I think the, what we’ve seen is the impact on, on these, on these retailers and the federal government, both at the Canadian level and the U S level have provided some rent relief programs.

But I think ultimately tenants are really hurting and landlords are really hurting in these markets. And the real question is what is the outlook for retail, you know, down the line and what are the opportunities for the sites? And is there going to be creative destruction in the sense that, you know, industrial comes along and repurposes these retail sites or residential repurposes, these retail sites. So question mark there. When we come to the office side, the office side, again, this was something, you know, this is my world from a day to day job.

And we have always said that flexible work, agile workplaces were things that did proceed this pandemic. They were going that way. And again, just like retail, we’ve kind of been pushed into this environment. However, there is a study that I’ll put a link to it’s from Deloitte. And I think it, it really encapsulates the types of mindsets. There are out there when it comes to office, at least on the leasing and occupying side, they break it down as the traditional lists, the Progressive’s and the visionaries and the traditionalist are these people that think are organizations that think culture centers around in-person environments, where employees prefer to work and collaborate in the office.

And there’s definitely that aspect. I think we all can feel that in certain organizations, I think Jamie diamond was a perfect example recently saying that I think by July this year, they, he wants some sort of return to office on a rotational standpoint. And then when you go to the Progressive’s, where for them culture is flexible, supports a hybrid workplace and employees, employees are comfortable working remotely or in the offices kind of on this hybrid work model. And we’re definitely seeing that on the ground level with certain companies and then the visionaries culture for them encourages autonomy and remote work employees working remotely most of the time and come into offices as needed.

And the reality of those three viewpoints is that investment in the virtual work environments, respectively would be low for the traditionalist. It would be higher or medium for the Progressive’s and then quite high for the visionaries. So I think that’s an interesting way to phrase it. I think ultimately, although the city centers have seen a bit of a sprawl into urban environments, I do believe that the cities will come back as we get vaccines as we move forward, where that ends up looking like from a square foot per person basis.

I think we’ll, you know, it’s the conventional wisdom, you know, use quotations here are in our industry, has been, you would imagine that there’s some companies that would need to take less space, but then ultimately there are going to be policies where we want to have people that aren’t so close to each other in the office. So where that ends up on a net basis remains to be seen. But ultimately I do think that the office environment, maybe not in it’s, you know, previous incarnation exactly will be what the future holds, but I do believe there will be some sort of hybrid version of the office.

And I think a lot of the workplace strategy professionals in our industry are talking a lot more about a hub and spoke model where you have more satellite offices and not all, you know, all employees in one HQ. When we move over to industrial, I think industrial industrial has really been the darling in the industry. A lot of the trades, a lot of the purchases have been done in industrial vacancy rates in some major markets are pretty much non-existent. There is just an increasingly large demand for this type of asset.

And I think that’s going to continue whether it’s logistics, warehousing fulfillment centers, they were the clear winners of 2020 and looks like 20, 21 as well. And this segment has remained resilient through the pandemic and a large part of that is the surge of e-commerce food delivery services, home improvement retailers, and to probably lesser degree medical supply companies. So ultimately I believe that this will continue. I it’s not going to continue indefinitely.

Hopefully there is some sort of normality when it comes to vacancy rates, but ultimately the big challenge, according to people that were interviewed in a PWC study is getting hands on high quality distribution space to facilitate e-commerce. So redundant retail space might be repurposed, as I mentioned before, into industrial uses to help with that last mile delivery and overall fulfillment distribution. So that remains to be seen. And we’ll see what happens there.

Lastly, on the multifamily multi residential side, this one’s interesting too because when the pandemic first started and we were in lockdown, there was a lot of talk that they are, would be delinquencies that the actual rent rolls would be would drop substantially. Landlords would only get maybe 50, 60% of their normal rent at turned out not to be the case in the United States. That was buttressed by quite a bit of fiscal policy stimulus into the economy in the way of different subsidies for individuals.

And it turned out that people were paying the rent. And I think the same thing is true in Canada. I think my opinion is both governments, at least in north America with those two countries really did not want a repeat of oh eight. And they really quickly put the gas pedal down on fiscal policy to get money into individual’s hands. So purpose-built, multi-family I think is going to be one that continues on this path. I doesn’t look like interest rates are going to be particularly moving one way or the other for the, at least the next year.

That’s what it seems to me. And while the asking price for rentals is either stable or has followed as fallen in some major cities, it’s expected that the rental market will eventually benefit from slowdown in home ownership. And when bore borders open up again, a backlog of new immigrants, especially in areas such as Toronto and other major markets. So ultimately looking to some of the sub sectors, the outlook is mixed when it comes to multifamily.

And that would be related to student housing and senior housing for senior housing. Some of the interviewers, at least in this PWC article, which I’ll also link up basically said that they’d be avoiding it, especially given the impacts of COVID-19 and the complexities of operating these centers, still many felt the demographic trends are positive for the sub sector in the longer term. And I’ve definitely seen that because I’ve talked to clients that are bullish on this area of multi-residential.

Lastly, for student housing, I believe that they are also facing challenges. The switch to virtual learning at post-secondary schools is dampening demand. And although many interviewees in this study believed that the long-term trend is positive. I think there is a little bit of kind of wait and see when it comes to the student rental market. So that’s my answer. I guess the question is CRE in trouble. And I think it’s, it’s one of those things where it’s tough to answer at holistically.

I think there are certain areas that are gonna face as they have been faced more challenges than other areas, but there are certainly areas where I think there is a, there is a lot of opportunity and we’ll see how that plays out in 2021. So anyways, let me know your thoughts. Those were my 2 cents. Feel free to send me a message whether on Instagram or on the website, Jesse, for galley.com and yeah, let me know your thoughts and I guess any other questions that you have really appreciate you asking them?

I always try to, to answer them as best as I can and send those in, and we’ll try to make this a regular thing maybe twice, twice a month. We’ll sprinkle these into the regular podcasting. So again, thanks so much. I really couldn’t do this without the listeners, all the guys and gals that have been supporting me through this journey really appreciate it.

Jesse (11m 10s): Anyways, have a great one and we will catch you in the next episode. Thank you so much for listening to working capital the real estate podcast. I’m your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.