The COVID-19 pandemic has affected millions all across the world. The pandemic’s deep and severe effect has not only been on the aspect of health but also on the business world and global economy. It has affected all types of investment avenues, and thousands are facing job losses all over the world.
According to Benjamin Gordon of Palm Beach, the real estate domain has also taken massive hits due to the ongoing pandemic. Only through a careful examination can investors devise better strategies to work around the adverse effects of the pandemic and the ensuing mandated lockdown.
Benjamin Gordon of Palm Beach talks about impact on real estate
Let’s look at the order of impact on various aspects of the real estate world and how a real estate investor can mitigate this complicated situation into a success story.
The strict lockdown has resulted in social distancing that we will have to continually observe in the upcoming months. With stock prices falling, reduced room rates, and low occupancy, the worst-hit sector is the hotel industry.
The retail malls were the first within the trade sector to be shut down due to the mandatory lockdown as the government tried to cut down on public gatherings. Retailers got struck hard, and rents required tough negotiations.
Since all industrial activity has seized, industrial warehouses’ use and requirement has lowered as well. E-commerce ventures are the only ones showing a demand for warehouse leases globally.
The least affected of the lot is back-office tenants since we have seen a steady rise in the demand for back-office spaces, quite similar to the economic recession of 2008. However, there is still a high chance that significant lease decisions will get delayed since governments might still enforce the complete shutdown of all office spaces if the medical situation worsens. While front office tenants haven’t been affected, a ripple effect will be visible as hiring will freeze for the upcoming months. This entails the lowering of interest rates in the future.
Effect on the cap rates
One positive effect of the COVID-19 pandemic are cap rates. By definition, cap rates are yields or the value for which the real estate or the property is available. Cap rates have a direct relation to the interest rates of the market. As the interest rates on various real estate purchases and loans have gone down, so has the cap rates. Our experts predict that the interest rates will lower even further as governments worldwide try to ease the burden on financial institutions. As the economy attempts to rejuvenate consumer demand, lower cap rates will allow investors to time their sales correctly.
Now is time for investors to make the best of this situation. Following the tips below will surely help you salvage whatever you can out of this situation.
Purchasing below replacement cost
Ideally, as an investor, you should look to purchase an asset below the replacement cost. This translates into a non-lowering rent as new construction will require a higher price for development.
The best leases are ones with longer lock-ins meaning the tenant will vacate the place only as a last resort.
An excellent trick to try; sign leases as a yearly escalation of 5% instead of 15% every three years, making the increase look gradual and evenly spread out.
Use of leverage
Keep in mind to avoid using leverage to buy assets that do not have long lock-ins to match the risk of rental cash flows, principal pay, and interest.
Grade A multinational tenants are the best option since, for these individuals, the rental cost is a proportion of the total revenue.
Keep in mind that you should only purchase total lease assets to mitigate the risks associated with development and leasing. It is a great idea to avoid dealing with a search for new tenants or unscrupulous developers in this present situation.
You should understand that these strategies will pay dividends during crisis periods, such as the one we are currently experiencing. As far as real estate is concerned, the real profit is during the purchase, not the selling. That is why it is vital to do your homework and research before acquiring a new property. Identify the asset, and research the pricing cycle to get the best investment even during an economic recession.