Bad news out of the commercial real estate sector is confirming what many economists predicted would happen as COVID-19 scoured across the globe.
In a report by the Financial Times, some US commercial real estate valuations have declined as much as 25% since the beginning of 2020. Architect billings have also shown little improvement over the past several months, which leads many to believe that the sector will see a decline in new construction in 2021. While a decline in commercial real estate values was certainly expected due to the coronavirus pandemic, the new data paints quite an ugly picture for the market.
Hotel occupancy has also dropped 32% year-over-year, with revenue per available room dropping 50% year-over-year. Despite tourism beginning to come back to life in several states, hotels are still struggling to fill rooms at levels anywhere near what they were pre-COVID. Several hotel CEOS have slammed Congress for inaction over coronavirus relief, questioning why something hasn’t been done to help the industry.
“They are just so stuck in their positions. I feel so aggravated by it. Why can’t we work something out?” Best Western CEO David Kong said, “If we don’t get a vaccine soon and business doesn’t return, it’s going to get much worse.”
Hotels are some of the hardest-hit businesses in the commercial real estate sector decline, along with malls and come office properties. Commercial mortgage-backed securities (CMBS) investors are also feeling the pain, although there may be an end in sight for those trading in such financial instruments. Unlike the housing bubble of 2008, even if the CMBS market were to crash it is far smaller than the residential mortgage-backed securities market, meaning it wouldn’t cause a full-scale financial crisis.
With several major companies acquiescing that remote work is here to stay, some office properties are facing a doomsday scenario. Despite how bad the data is now many predict that the worst is yet to come, leading to a decimation of the sector as a whole. As coronavirus cases continue to rise across the United States, even companies that wish to return to the office will probably need to wait until after the expected “second wave” of the virus passes. So while it might be tempting to pick up CMB securities for your financial portfolio at all-time lows, you may want to wait—things aren’t looking up for commercial real estate.
Patrick Auger is a management consultant and entrepreneur who resides in Austin, Texas. He has a Bachelor of Arts in Business Management from Western Illinois University, and is the Founder and Principal Consultant at Auger Consulting Group, LLC. When he's not writing for The American Genius, he's writing about the business of Mixed Martial Arts for The Body Lock or learning how to cook, one burnt recipe at a time.
