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How to Tell Which CRE Firms Will Survive

Posted by: | Posted on: May 22, 2020

As businesses begin reopening in different regions of the country, some commercial real estate firms are better prepared to weather the uncertain environment than others.

“The bigger the investment, the better off you will be, and the old adage of ‘diversity’ proves itself once again,” says Jeff Holzmann, CEO of real estate asset management firm IRM, which manages more than 250 projects totaling more than $2 billion in asset value across multifamily, hospitality, retail, industrial and office. “If you have invested in a portfolio of assets across the country, some assets will do better than others.”

But if your assets sit in hard-hit areas, such as the Northeast, you could be in trouble.

“If you have a real estate position in a narrow, localized market, then it’s going to be a hit-or-miss depending on the nature of the measures currently in place to fight COVID-19 in that area,” Holzmann says. “Think of a national hotel chain, for examplesome locations like Oklahoma, Georgia, South Carolina and Texas have opened up and are seeing revenues climb back up, while other locations, such as New York, New Jersey and California are still on lockdown and might be for many more weeks.”

Lockdowns, high unemployment and struggling retailers and hospitality operators aren’t the only developments that CRE firms must watch. Twitter and other companies adopting widescale teleworking could upend the calculus around where people work and live.

“In a mostly digital economy, positions can be changed quickly,” Holzmann says. “The reality is, as Warren Buffet said, that all business is local. In times like these, people tend to invest more in areas where they reside or feel they understand better.”

Coming out of COVID-19, Holzmann thinks real estate will be very fragmented, with overall lower prices and some very unique local opportunities for those who are willing to take risks. “The basic rule is that people will always need a place to live, but the devil is in the details,” Holzmann says. “If businesses really shift to more remote work and consumers change behaviors, such as shopping patterns, as a result of long exposure to social distancing measures, then the impact on the industry could be significant on a global scale.”

Even though the shutdown only truly began in early March, creditors have already taken over some properties.

“Every asset has a story, and the details do matter, but on a macro scale, it is safe to say that a substantial amount of developers will not be able to sustain and operate per the original plans,” Holzmann says. “In real estate, that means that creditors [mostly banks] will resort to foreclosing on the assets and removing the sponsor in order to move towards a sale and recover their investment. This will happen across all real estate categories but will be most noticeable with commercial developers that had a large leverage position. The ones that started with mostly cash will be in a position to move in and reap the benefits of lower prices and higher supply.”

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