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Dry Powder Spending Post COVID-19: Opportunities and Risks

5 MIN READJune 25, 2020
 The markets have been behaving strangely in the last months as the COVID-19 pandemic has shifted the world. Governments all around the globe have stepped up to avoid an economic collapse, taking in debt and analyzing all strategies to keep companies afloat. Then, in late March the market troffed but only to regain momentum a few weeks later. During our latest GRI eMeeting, 83 percent of GRI Club members agreed that the equity markets have gone too far too fast in the last few weeks, and many real estate players are bewildered as to what will come next.

With all this in mind, 36 percent of the GRI Club members expect a material correction in equity valuations in the next six months while 21 percent expect it in the next three months. There are very few deals in the market right now. The real estate market is facing liquidity problems and the secondary credit market is expected to take a deeper dive. Credit is important to any type of RE investor and has driven the situation, inflating high asset prices. New loans are difficult to acquire and pricing has become an enigma. 

Now that the market is back, it has increased the flow of interest among market players. Some members have received bank extensions, and count with furlow payments or government support. There is optimism about what will come in the next months and that the world will eventually return to what it looked like in 2017. The RE industry had a good boom, and returning to at least 2017 rates would be a positive step. There is a great amount of money out in the market to be deployed and the Asian and Middle Eastern markets are exploring opportunities. But is it more risk than opportunity in the market right now? 

Opportunities Ahead or Still Too Much Risk? 

There is a tremendous amount of opportunities in distress assets in the long term, particularly in the senior housing and healthcare market. Approximately 40 percent of the US fatalities took place in these facilities and therefore the industry must rethink it. Members see that there will be asset trading and vast amounts of innovation in the future. In terms of well performing assets, there is a lot of continued interest in logistics and industrial with reshoring and rehoming. Members share that they are seeing some M&A activity in small assets small, but valuation continues to be in a quandary. Interest rates will most likely not rise, and spreads have increased but with the same cap rate. In general, interest rates have gone down and some investors are looking at the opportunity to make value. 

The investment environment at the moment will make opportunistic inventors feel comfortable. According to members, the market is filled with opportunities, especially in the next six to nine months. Risk continues to be in the eye of the beholder. Risk pricing is very challenging, and now more than ever. For instance, pricing the risks of operating a hotel is extremely difficult since it is not known what measures or investment will have to be made to create a secure environment. The underwriting of hotels will change significantly as well. There will be many winners and losers after this pandemic, and it will change how business is done overall. Members added that in a low interest rate environment, core + would allow for interesting returns with a limited downside. 

Excitable or Nervous Speculation Regarding Accelerated Real Estate Trends?

When it comes to offices, many companies are faced with the challenge of increasing their ft2 per employee due to COVID-19 measures. There is great conversation and debate regarding the future of office spaces. How has COVID-19 changed the sector and will this be permanent? Many believe that home office is here to stay, but it is also a biased and age dependent equation. Younger people prefer to choose where they work, while Baby Boomers and older generations are more attracted to the idea of working in an office space. 

It has already been seen that suburbs surrounding major cities such as New York and Los Angeles have increased in the last month. Thes surges are accompanied with the reasurge of the car and people less willing to use public transportation. Leaders believe there will be a rise in suburban office demand in middle-sized cities. There is speculation that more people will prefer to live further away from city centers, with larger spaces and commute to work once or twice a week. City offices will increase their space in meeting rooms, becoming a meeting point for those doing home office and working in-office. Lowering density will be a major challenge for all asset classes, and it will push for innovation and creativity. 

Student housing is also in question. What will happen to universities and housing? Some universities will open in August, but is it the time for housing assets to reopen as well? Education assets are unique assets as they rely heavily on the brand and the community surrounding that university. If there is no longer a community, and a vast majority of it is online, the whole dynamic will shift. 

But again, there is great speculation in the markets. Nobody knows what is going to happen and how trends will shift. This makes it a difficult asset class to underwrite today. But one thing is almost certain, people want to be around people. The global economy is shut at the moment and nobody has seen something like this before. The industry is learning day by day and it will take time. If the industry continues communicating, sharing practices and experiences, real estate will learn and adapt to survive. 
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This article was written based on the eMeeting: Dry Powder Spending in the Age of Covid Recovery Golden Opportunity or Dark Danger? on June 16. Some of the GRI Members that participated are: Alexi Antolovich (Macquarie Group), Audrey Klein (Kennedy Wilson), Brian Finerty (Equity International), Keith Breslauer (Patron Capital), Laurie Mahon (CIBC), Mohamad Abouchalbak (SFO Group), Ron Rawald (Cerberus Capital Management) and Steffen R Doyle (Credit Suisse).
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