As cases of Covid-19 surge, financial markets have nosedived — a fate that has not escaped public real estate investment.
Industry experts say some investors are trying to turn lemons into lemonade, hunting for opportunistic plays. But others note that negative sentiment already has seeped into the private real estate investment world, as the uncertainty of the pandemic and its impact on the economy has stopped some deals in their tracks.
“We’ve seen that investor confidence has been shaken,” said Sam Chandan, associate dean of New York University’s Schack Institute of Real Estate. “The driver of that is not new questions around the attractiveness of real estate as an asset class generally, as much as it is a response to a very severe and abrupt exogenous shock to the economy that is impacting all asset classes and investors.”
The stock market sell-off began a month ago as investors began to absorb the global economic effects of the coronavirus. Since then, the Dow Jones Industrial Average has lost the gains it has made since President Trump was inaugurated in 2017. Public real estate firms have also been hit hard, which has confounded some analysts and experts who note that public real estate investment trusts in particular are generally considered safe assets when the market is in distress.
“What happens in the public stock market bleeds into private market sentiment, though it’s not yet known if the recent financial market fallout will trigger a drop in private asset valuations,” said Evan Hudson, a New York-based attorney at Stroock & Stroock & Lavan who represents real estate investment trusts of all stripes and real estate investment funds.
Hudson said many REITs have drawn down their credit lines, meaning they are sitting on war chests of capital. He said he has some REIT clients asking whether they can use this time as an opportunity to buy public securities, and how they can be sure to maintain their status as a REIT — which requires certain qualifications for firms that own or finance income-producing real estate — as they look into other investment opportunities.
“This is a shakeout, and the winners are going to be the REITs and the private buyers that already have liquidity,” Hudson said.
It appears the pandemic has effectively halted private real estate deal activity in Asia, which has been among the regions hit hardest by the coronavirus. The region has seen just 14 deals since January — and only two of those deals were done this month — compared to 39 for the same time last year, according to data provided by Preqin, which tracks the alternative investment space.
Private real estate investment already has been declining globally after peaking in 2018, according to Preqin. Last year there were 9,538 private real estate deals totaling $453.1 billion around the world. That year saw about 330 fewer deals than in 2018, when global deal value, which had steadily been rising since at least 2010, totaled $469.4 billion.
Thomas Donovan, partner and vice chairman of commercial real estate brokerage B6 Real Estate Advisors in New York, said he has had a few deals where buyers had pulled back on pending deals, citing the volatility in the market. Donovan also noted his firm has opted to not actively seek out new business — he said he wants to be sensitive to clients and peers as everyone navigates uncharted territory professionally and personally — but rather focus only deals in the pipeline.
“Anytime there’s uncertainty in the market, if something is not a must sell or a must buy, people are going to take their time and take a step back,” Donovan said. “Because they want to measure twice and cut once.”
Still, at least as of last week, before Gov. Andrew Cuomo instituted a ban on non-essential businesses — including real estate brokers — there was some activity happening.
Metro Net Realty’s Joseph Barretta and Max Rather, brokers who focus on industrial and self-storage investment sales, said last week they secured two letters of intent for development sites in Brooklyn and Nassau County, where developers and their pension fund partners plan to construct a self-storage site and a class-A industrial facility, respectively. The partners said they had been working on those deals for about two to three weeks. (Deals typically move more quickly in industrial sectors, as TRD has previously noted.)
“It can take years for developers to bring a new building to market,” Barretta noted. “One developer who submitted a letter of intent was anticipating a short-term economic decline that should bounce back quickly. Absolutely no one is predicting a long-term recession at all.”
Hudson, the REIT attorney, said his clients’ mood on the economy and investment sentiment can change on any given day. When the markets dived last week, he said people were predicting a global depression. But moods seemed to lift on calmer trading days and whenever there appears to be progress from the federal government to pass a stimulus package to blunt the economic fallout from the virus.
“The public market tracks private investment sentiment incredibly strongly,” Hudson said, adding, “On days like that, people feel a lot better.”
Source: The Real Deal