Effects of COVID-19 Shutdown on Commercial Real Estate

The pandemic turned all that upside down, along with just about everything else.

Among the types of properties whose valuations are likely to be most influenced by COVID-19 are lodging, retail and multifamily real estate, according to Trepp's research.

"Lodging and retail properties have already had to face the immediate reality of lost revenues due to the pandemic," Trepp reported. "Hotel operators in hard hit areas have seen occupancies plunge from their stabilized 70% range into the high single digits, or in some cases, have been forced to close their doors all together until the crisis subsides."

In addition, data tracked by Trepp shows the percentage of lodging properties that did not make their April mortgage payment stands at approximately 20%, compared to the previous months where that percentage hovered around 2%. Retail properties financed using the same mechanisms that did not make their April mortgage payment hit 10%, compared to 2% in the previous months.

Even more questions came up for operators of those increasingly upscale student housing properties near colleges and universities.

"If campuses remain closed for the upcoming 2020 fall semester, student housing assets are going to suffer loan defaults at an unprecedented level," Trepp said. "When college students (and their parents) realize how much money can be saved by living at home or someplace cheaper than on/near campus, do those students decide to come back to amenity laden 'student housing' complexes?"

More questions abound for the office market, which awaits decisions by companies about whether to send their employees back together or have then continue working remotely.

"From an appraisal perspective this asset class is probably the most stable right now, but that can change rapidly over the coming weeks," Trepp said.

But some office markets will be harder hit than others. Take Houston, for example. The Covid-19 caused oil glut has delivered a double blow, the report said.

Trepp concluded the report with advice to commercial property owners. "Be proactive," Trepp said. "Try to adapt to this new normal in ways that would otherwise seem unconventional. Create revenue opportunities by looking at every possible alternative use of your asset. If you end up needing an appraisal, make sure you have your previous years' financial statements in order, be able to articulate how you plan to make it past this crisis, and know what similarly situated properties are doing to weather the storm."

Is it even necessary to say, "cut costs?" Maybe not, but Trepp offered some advice about that. "There has never been a more important time than now to prudently and actively manage your property's expenses," the report said. "Minimize all controllable expenses and make sure the appraiser knows how you intend to do that."

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Katheryn Hayes Tucker is an Atlanta-based reporter covering legal news for the Daily Report and other ALM publications.