Prior to the Coronavirus crisis, commercial real estate (CRE) demand and supply fundamentals were largely healthy in most markets and property sectors. The U.S. labor market and household formation had been very strong, driving robust demand for commercial space. Relatively conservative underwriting and rising construction costs constrained new supply.

In recent months, however, the global pandemic has led to a rapid downturn of the U.S. economy, negatively impacting different industries and real estate dynamics. The fallout is still developing, and the ultimate impact of the outbreak on the economy and the CRE sector remain uncertain.

Nevertheless, we believe that the unprecedented monetary and fiscal stimulus programs – and the transitory, self-induced nature of the shutdown – will facilitate an economic recovery once the outbreak subsides and/or the virus is treatable. Pent-up demand will also encourage a rebound.

Pre-crisis, U.S. CRE had near-cycle low vacancy rates and attractive pricing relative to U.S. Treasuries and investment grade bonds, which may help mitigate some of the negative impact. U.S. financial institutions are not over-leveraged thanks to tighter regulations after the global financial crisis (GFC) of 2008.

Social distancing practices and changing daily routines appear to be accelerating some existing trends in CRE, which will influence sector allocation strategies.

Pre-Coronavirus fundamentals combined with preliminary impacts of the pandemic may lead to:

  • Industrial’s ongoing rise,
  • Retail’s continued slide,
  • Increased allocations to multifamily,
  • Gradual lessening of importance of the office sector, and
  • Gradual growth in alternative property sectors.

We expect investors to make strategic adjustments in sector allocations to reflect these shifting investment themes, which may help enhance portfolio performance while reducing potential risks.