It has been almost six months since most of North America went into government-imposed lockdown to stop the spread of COVID-19. While many businesses have been allowed to re-open, the caveats in place to ensure social distancing rules are adhered to are making it hard for some businesses to effectively recover.
Many businesses didn’t make it, including some very large, established brands.
It’s easy to feel sympathy for the poor restauranteur who lost her venue because she missed too many rent payments or the entrepreneur whose office-sharing business went belly-up. But there’s another victim in all this, that victim is the landlords.
Most people don’t have a lot of sympathy for landlords. Commercial landlords are generally thought of as large, faceless corporations that care about only one thing - the bottom line.
The truth is, in most cases, this assumption is 100% correct. What most people forget to consider is that often, those faceless corporations are actually pension funds, and therefore, the fate of landlords after COVID-19 is very much tethered to the fate of the rest of us.
Finding a Safe Haven for Investment
According to The Economist, the amount of investible commercial property in the world has quadrupled since 2000 to $32 trillion. What’s driving such incredible growth? Well, as we’ve talked about in previous posts, institutional investors (pensions funds, REITs, etc.) are required to achieve certain returns for their clients. For the past 20 years, no investment has produced the solid, lucrative returns of commercial real estate. Given that many commercial leases last for a decade or longer, fund managers could literally park funds for decades and be confident that investment would produce more consistent returns than public equities and commodities.
The financial crash of 2008 drove investors deeper into commercial real estate as both the amount of institutional commercial real estate investors and the amount invested has steadily increased since 2010. Specifically speaking to pension funds, fund allocation to commercial real estate has doubled since 2000 from 5% to 10%, representing about $11 trillion in pension funds tied up in commercial real estate.
COVID-19 has brought institutional investors’ love affair with commercial real estate to a screeching halt as it no longer poses the bankable ‘safe haven’ it once did. Almost six months into lockdown in North American with no end in sight, how much longer can commercial landlords subsist without rent?
Are Your Retirement Savings At Risk?
Predicting the fallout from this unprecedented moment in history is a tough task, with some estimates projecting a 20% drop in value for commercial assets and others predicting 40% or more. Of course, the big question on everyone’s mind is: How will this impact my retirement savings?
The COVID-19 pandemic and resulting government restrictions haven’t destroyed commercial real estate as an asset class, but rather challenged investors to become less complacent with their investment strategy.
Long-term, the focus will be on repositioning or redesigning commercial assets to better suit the ‘new normal’. For instance, offices can be remodeled to better support social distancing or a retail plaza can be turned into warehouse space. In short, COVID-19 may have stifled institutional commercial investment strategies, but it hasn’t stopped them.
As with any fundamental change in society, those that can adapt and capitalize on new opportunities will succeed while those clinging desperately to the old ways will eventually be culled from the herd.