The Q1 2020 RICS-AFIRE North America Commercial Property Monitor results fairly predictably show the spread of the pandemic exerting a significant impact on the real estate market with the key metrics capturing sentiment among occupiers and investors moving into negative territory in both the US and Canada. Significantly, concerns regarding the outlook for the economy are visible both in the sharp drop in the tenant demand indicators and as well as in expectations regarding the outlook for rents.
Comments from respondents to the survey underline the uncertainty about the likely extent to the impact of the virus but note among other things that some occupiers are already asking for rent reductions and that while the results may be similar to the 2008 recession, the effects will create drastic long-term changes in the office and retail markets. In the US, capital values could decline by more than five percent, which contrasts starkly with pre-pandemic expectation of a modest increase over the same period.
“While sentiment is a tough metric to track in the midst of a pandemic, these data tell an important story over time. Before the coronavirus, investors came into 2020 feeling positive about US real estate. These results advance that narrative, but with some smart and necessary caution,” said Gunnar Branson, CEO, AFIRE.
Primary market industrial and multifamily properties are the only sectors that still hold optimism for respondents. The decline in retail is now projected to be particularly severe, particularly in the secondary market space. For the US, the proportion of contributors seeing real estate in a downturn has jumped to three quarters from just one in six previously. Credit conditions are predictably viewed as deteriorating, though interestingly, a large majority of respondents expect to see a deployment of capital disproportionately towards the US over the next year as compared to Canada, Europe and Asia.
Outlook weaker yet for real estate market
Globally, both investors and occupiers fear that we are not yet over the worst when it comes to the impact on the real estate sector. The forward-looking metrics show an even more pronounced shift. Looking at the expectations for the next twelve months, in the case of both capital and rental values, the net balance reading has fallen in excess of 50 points since the previous quarter.
Previously upbeat markets see biggest knock
Countries that had seen rapidly rising expectations pre-COVID-19 have seen the biggest knocks to confidence. The US is no exception. In terms of capital value projections (in net balance terms) the US recorded a pronounced drop, with the net balance moving by -72 points.
Shift in sentiment in offices most marked, as working patterns shift
The results are not uniform across real estate sectors. While retail is the most depressed following the impact of global lockdowns, the deterioration in sentiment has been marked for offices. This is the case both for global occupier sentiment, which fell by 35 points, and for investors, which dropped 29 points.
Anecdotal evidence from survey respondents bear out the sector patterns with a number highlighting the scope for agile working to become more commonplace in the aftermath of the virus, lowering the demand for office space in particular. The acceleration in the structural trend towards e-commerce is also noted, with increasing interest in prime logistics space viewed as a likely outcome.
Simon Rubinsohn, RICS Chief Economist, commented:“The impact of COVID-19 on sentiment in the commercial property sector was always going to make for painful reading. However, the erosion in confidence is stark.What’s even more worrying for investors and occupiers alike is that the full extent of the toll it will take on businesses and the underlying economy is still unclear. Given these conditions, respondents are clear that there will be no quick rebound.
“Although hard to generalise, this hostile environment makes government support all the more vital to underpin a global recovery as lockdowns begin to ease. There is also a strong case for a more collaborative approach between landlords and tenants to manage the challenges presented by the current set of circumstances.
“What started as a public health crisis morphed into an economic one, and we will see further structural, long-term change as a result of this pandemic. We have already seen the impact on retail as consumer behaviour changed by necessity, and remote working affecting how office spaces are viewed. The ongoing rise of e-commerce and a shift in supply chains towards “Just In Case” is likely to trigger a further change in the investment dynamic.
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Global Commercial Property Monitor
RICS’ Global Commercial Property Monitor is a quarterly guide to the trends in the commercial property investment and occupier markets. The report is available from the RICS website www.rics.org/economics along with other surveys covering the housing market, residential lettings, commercial property, construction activity and the rural land market.
Methodology
Survey questionnaires were sent out on March 11 2020 with responses received until April 13 2020. Respondents were asked to compare conditions over the latest three months with the previous three months as well as their views as to the outlook. A total of 2604 company responses were received, with 592 from the UK. Responses for Ireland were collated in conjunction with the Society of Chartered Surveyors Ireland. Responses for Spain and Portugal were collated in conjunction with Iberian Property. Responses for New Zealand were collated in conjunction with Property Council New Zealand. Responses have been amalgamated across the three real estate sub-sectors (offices, retail and industrial) at a country level, to form a net balance reading for the market as a whole.
Net balance = Proportion of respondents reporting a rise in a variable (e.g. occupier demand) minus those reporting a fall (if 30% reported a rise and 5% reported a fall, the net balance will be 25%). Net balance data can range from -100 to +100. A positive net balance reading indicates an overall increase while a negative reading indicates an overall decline. The RICS/AFIRE Occupier Sentiment Index (OSI) is constructed by taking an unweighted average of readings for three series relating to the occupier market measured on a net balance basis; occupier demand, the level of inducements and rent expectations. The RICS/AFIRE Investment Sentiment Index (ISI) is constructed by taking an unweighted average of readings for three series relating to the investment market measured on a net balance basis; investment enquiries, capital value expectations and the supply of properties for sale.
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About AFIRE
AFIRE is the association for international real estate investors focused on commercial property in the United States. Established in 1988, AFIRE is an essential forum for real estate investment thought leadership, with a global membership including more than 200 organizations representing approximately $3 trillion in assets under management. Its members gather throughout the year to help each other become Better Investors, Better Leaders and Better Global Citizens through conferences, research, publications, research and analysis of real estate capital markets, cross-border issues, policy, economics, technology and management.www.afire.org
