OVID-19 drastically affected the financial landscape worldwide. The effects have rippled through every industry, including commercial real estate (CRE). Long-struggling malls and retail stores have taken an especially devastating blow. Between social distancing and consumers cutting discretionary spending, malls simply can’t catch a break. Without loan restructuring and innovative solutions to keep retail stores afloat, malls could become a thing of the past. To predict the future of malls and commercial real estate, it’s important to examine how we got here. Ecommerce: The Original Retail CRE Challenge: In February, the COVID-19 pandemic was mere weeks away from taking hold in the U.S. At the time, retail management company Vend boiled the Ecommerce vs. retail race down to purchase type. “Consumers are making more convenience purchases online,” Francesca Nicasio wrote, “but they’re still making their luxury and experiential purchases in person.” Indeed, retail CRE investors had been closely tracking the growing popularity of Ecommerce. Online sales were predicted to grow from $1.3 trillion in 2014 to $4.5 trillion in 2021, and that was before the pandemic. In response, some CRE investors moved away from retail. Hedge funds found CRE bundles with a high proportion of mall loans and bet against them. Then came the pandemic. Click to read more at www.pioneerrealtycapital.com.

By Christopher H. Volk | Spring 2020

As much as commercial real estate is a game of numbers, data, and analysis, the human component plays a huge role in what deals are made and how they get done. Examine your decision-making process — can you comfortably say you’re free of unknown cognitive biases? Probably not. In that case, what biases — psychological, emotional, and/or cultural, for instance — influence your choice to go this way instead of that? To begin this discussion, let’s take a simple hypothetical: You have an opportunity to invest in either a store operated by an Ashley Furniture licensee or a nearby Home Depot. If all significant variables are eliminated, which do you choose? When I ask graduate business students, they generally opt for the Home Depot. Those who don’t are reluctant, still preferring the Home Depot but assuming some subterfuge on my part. After all, Home Depot has exceptional brand awareness, a high investment-grade A credit rating, and is the nation’s largest home improvement chain, with approximately 2,200 locations. In contrast, Ashley Furniture has about 800 locations, most of which are operated by individual licensees. Simply put, Home Depot as a tenant seems to make the real estate more desirable. Click to read more at www.ccim.com.

The real estate sector includes companies that own, develop, and manage residential, commercial, and industrial properties. Each of these three real estate segments includes publicly traded real estate investment trusts (REITs). REITs are vehicles that legally allow individual investors to buy shares in real estate portfolios that receive income from a variety of properties. REITs’ key metric is funds from operations (FFO), a measure of earnings particular to the industry. Some big names within the sector include American Tower Corp. (AMT), Prologis Inc. (PLD), and Digital Realty Trust Inc. (DLR). Real estate stocks, as represented by the Real Estate Select Sector SPDR ETF (XLRE), have underperformed the broader market with a total return of -5.8% compared to the S&P 500’s total return of 8.7% over the past 12 months.1 These market performance numbers and the statistics in the tables below are as of May 26. Here are the top 3 real estate stocks with the best value, the fastest earnings growth, and the most momentum. Best Value Real Estate Stocks: These are the real estate stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows you’re paying less for each dollar of profit generated. Click to read more at www.investopedia.com.

The world’s biggest real estate investors are sitting on piles of cash, preparing for once-in-a-lifetime opportunities created by the pandemic. With economies around the world sputtering, commercial real estate prices are expected to come down. How much they’ll fall is the key question.Sellers are currently willing to concede discounts of around 5%, while bidders are hoping for about 20% off pre-pandemic prices, said Charles Hewlett, managing director at Rclco Real Estate Advisors. That estimated gap, which is likely wider in specific cases, has put a freeze on deals. “The mantra for anything that hasn’t gotten started is delay, defer, and in many cases, renegotiate,” Hewlett said. “If I’m going to have vintage May 2020 on my books, I want to be able to demonstrate to my investors that I got an exceptionally good deal.” Dry Powder: Private equity firms across the globe hold an estimated $328 billion in dry powder for real estate deployment, according to the data firm Preqin Ltd. Prior to the crisis, asset prices had been pushed up as investors chased yield in riskier corners of the property market. Now, Blackstone Group Inc. and Brookfield Asset Management Inc., the largest real estate investing companies, are expected to hunt for bargains among the fallout from the pandemic. Click to read more at www.bloombergquint.com.