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Commercial property market on ice as virus wreaks havoc
A FREEZE is settling on commercial property markets.
Buildings that bustled with diners, drinkers and shoppers just weeks ago have gone quiet. Hotels that housed vacationers and business travellers are empty, while the industry in the US loses an estimated US$1.4 billion a week. Offices are eerily quiet.
The tendrils of frost are spreading to industrial properties, apartments, and even student housing - usually stable in hard times.
This time, universities are ordering students off campus. As Covid-19 spreads, all the once-reliable havens are mired in uncertainty.
"On the investor side, there's widespread panic," said Alexi Panagiotakopoulos, partner at Fundamental Income, a real estate strategy firm. "There's downward pressure on every aspect of every asset class."
Assets cannot be valued when tens of millions of people around the world are locked in their homes and commerce has largely come to a halt, with no idea how long the crisis will last.
A lack of consensus about the current or future value of assets is also threatening property sales, closing an exit door for investors and landlords.
The even bigger question is what will come when the crisis recedes. For every kind of property - not to mention a wide range of human activity - there will likely be long-lasting changes, said Scott Minerd, chief investment officer at Guggenheim Partners.
Without clarity on those big questions, investors will be reluctant to part with their cash.
Investment activity could fall by 45 per cent this year in the US, which would be more than the decline following the Sept 11 terrorist attacks in 2001 or the 2008 financial crisis, according to Kiran Raichura, senior property economist at Capital Economics.
Already, large deals are collapsing or getting postponed.
The Canada Pension Plan Investment Board's (CPPIB) planned sale of a 50 per cent stake in the £900 million (S$1.52 billion) Nova development in London's Victoria district collapsed last Friday.
Singapore-based ARA Asset Management, which was lined up to purchase the pension fund's half of Nova, will no longer complete the deal, according to people familiar with the matter who asked not to be identified because the details are private.
Nova is a complex of offices, restaurants and stores in London's Victoria district that CPPIB owns in a venture with Land Securities Group.
ViacomCBS said earlier this week it is suspending plans to sell Manhattan's Black Rock building because the Covid-19 outbreak has prevented would-be buyers from visiting the property, the former headquarters of CBS.
It is also unclear what will happen with mall owner Simon Property Group's US$3.6 billion bid to buy rival Taubman Centers. Both mall operators have closed most of their properties and Taubman's shares have been trading below the proposed deal price for more than two weeks.
In the UK, more than £11 billion has been frozen in property funds with appraisers warning that the virus makes it impossible to assess their value.
The merger of brokers LSL Property Services and Countryside is already on the scrap heap and other deals in London are being delayed.
China's office market, meanwhile, was being hit by plunging rents and high vacancy rates amid slower economic growth even before the novel coronavirus.
Office vacancies in Shanghai, China's financial heart, may climb to 28 per cent next year, according to Colliers International Group.
Shares of US real estate investment trusts, particularly those that own malls, have been hammered. Brookfield Property Partners, which made a big bet on malls with its US$15 billion acquisition of GGP in 2018, expects its tenants to face "severe consequences" in coming weeks with substantial parts of the economy shut down.
Its chief executive officer Brian Kingston sent a letter to shareholders last Friday, noting the firm has US$6 billion in undrawn credit lines and cash on hand.
"From a corporate liquidity perspective, we are in good shape," he said. "We expect this will be more than sufficient to weather a protracted downturn."
Companies such as Hilton Worldwide Holdings and Caesars Entertainment have been tapping backup loans to shore up their finances.
The sudden threat to tenants that pay rent is an unwelcome shock for office and warehouse landlords. For retail and hospitality property owners, it could be fatal. "The implications could be far-reaching, but quantifying these is highly speculative at present," said Matthew Saperia, an analyst at Peel Hunt.
With so much uncertainty, the availability of credit is shrinking. New financing for hotels, malls and senior living has mostly disappeared. Debt that is reliant on income from building tenants is suddenly very risky.
Looming threat of recession
As much as 15 per cent of loans on commercial property could default over the next couple of years if there's a recession, according to Mark Fogel, CEO of Acres Capital, a private commercial real estate lender.
Large commercial lenders such as Blackstone Mortgage Trust and Arbor Realty Trust have seen their stocks plummet during the virus-fuelled market turmoil.
"Nobody knows where deals will be priced and nobody knows just how long this issue is going to affect the world and how much it'll affect the underlying collateral," Mr Fogel said.
Meanwhile, the threat of a recession is looming larger by the day, with applications for unemployment benefits surging as hotels, restaurants and other businesses cut employees.
There will not be a "back to normal" once all of this is over, says Guggenheim Partners' Mr Minerd, who sees demand shrinking for virtually every type of commercial real estate.
Shopping malls will close permanently, demand for office space will decline - even industry conferences and social events could be replaced by telecommuting, he said.
Guggenheim had approximately US$275 billion in assets as of Dec 31, about 20 per cent of that in real estate.
"I think there's going to be a permanent change," he said. "People are more comfortable at home. Why do they need to commute?" BLOOMBERG