Analysis by David Salz and Thomas P LaSalvia, PhD
It has been approximately 6 months since COVID-19 became daily front page news. The virus, and subsequent economic shutdown, has dramatically changed our day-to-day lives and our interaction with the built environment. The ultimate effects on commercial real estate are still uncertain, but likely to be significant and far-reaching. This week we pause to look back on what has occurred in the CMBS universe and discuss the links between stress in that market and the changes in CRE rents and vacancies indicated in the REIS Q2 data release.
From the figures below, it is clear that the vast majority of CMBS stress is found in the lodging and retail sectors. Occupancy rates for hotels continue to trend well below their typical summer averages, and every week we hear of bankruptcy filing from long-term tenants of malls and shopping plazas across the country. Early in the pandemic, stay-at-home mandates, and the consequential decline in employment and spending, were somewhat offset by government support for businesses and households. Many landlords, lenders, and tenants were willing and able to work together to modify loans and payments, or at a minimum, “kick the can” and wait to see if the virus could be contained in a timely manner. From a space market perspective, this meant that rents and vacancies were able to remain fairly stable even though the economy was mostly shut down. While concessions did begin to show up in effective rents, vacancies were relatively flat across the board in the second quarter. Ordinally, retail was hardest hit with a national level effective rent decline of 0.6%, while industrial was the only sector not to record negative rent growth, ending the quarter with no change. Transaction volumes in the quarter were very low, roughly a 10th of their recent quarterly averages. Interestingly, the properties that did trade typically did not receive much of a haircut, likely due to many deals being agreed upon prior to the pandemic and simply closing in the quarter, or, from a historical perspective, there is often transaction bias during early days of recessionary periods as often only high-quality properties trade.
Looking forward, controlling the virus and the pace of a widely available vaccine will determine the impacts on both the space and capital markets. If current consensus macroeconomic forecasts hold, rents for all sectors will decline through the rest of 2020 and into 2021, before slowly recovering over the next 3 to 4 years. The capital markets, and CMBS in particular, are in a much better situation than 2009, but there is still potential for major stress on the horizon, especially if the government can not come to an agreement for a new relief package. In the near term, there are rumblings that September will bear a few “green shoots” in the form of new CMBS issuance. Closely monitoring these deals will give us interesting insights as to the sentiment of major market participants.
David Salz leads the Moody’s Analytics CMBS desk within the Structured Content Solutions group, providing timely and insightful data analytics to CMBS and CRE professionals. Prior to his current role, he managed the ABS desk and worked on various CLO related projects.
Thomas P LaSalvia, PhD is a Senior Economist in the research and economics department at Moody’s Analytics REIS.