It’s been made clear by now that the retail, restaurant, travel and energy sectors have been hit the hardest by the impact from the COVID-19 crisis. But a recent report from Reonomy, a data platform for the commercial real estate industry, also highlights that administrative work, arts, entertainment and recreation industries have seen outsized fallout. Across the U.S., all these industries account for approximately 14 percent of GDP, Reonomy researchers point out.
In addition, many of these industries are concentrated in specific states, leading Reonomy to conclude that Alaska, Nevada, New Mexico, Oklahoma and Wyoming will be among those that will suffer more from the pandemic. Firm closures in the impacted sectors can lead to higher unemployment rates and longer-lasting periods of unemployment for workers, and to decreased tax revenues for the states. And decreased economic activity will also weaken property valuations.
In addition to the above-mentioned states, states with high concentrations of at-risk jobs include those that rely heavily on tourism (Mississippi, Louisiana, South Carolina and Hawaii), states with high levels of energy production (Wyoming, North Dakota, South Dakota and Louisiana) and states with large manufacturing sectors (Indiana, South Carolina, Alabama and Kentucky).
Complicating the matter are higher commercial rental rates in some of the most affected states. The higher the rents, the more difficult it will be for struggling tenants to pay them, even when the impact of the government’s PPP loans is factored in, Reonomy notes. The harder hit markets may ultimately experience valuation decreases somewhere in the low double digits, says a Reonomy analyst.
To get further insight on what the report’s findings mean, NREI spoke with Omar Eltorai, market analyst at Reonomy.
This Q&A has been edited for length, style and clarity.
NREI: Which industries are taking the hardest hit right now because of the COVID-19 crisis?
Eltorai: If you’re looking at the hardest hit industries as a whole, I think the energy [industry], not fully COVID-related, but energy is in a lot of pain right now. Then, things that are COVID-related, if you look across retail, food and beverage, those are particularly hit hard, as well as travel and leisure, hospitality and hotels. These are really either hit harder because they are generally more reliant on physical foot traffic and the physical experience. So, social distancing, as well as the psychological change that COVID-19 has introduced to the American consumer, these industries are dealing with an outsized portion of the pain. The businesses that are hit hard are likely going to have more difficulty meeting their short-term, as well as their longer-term, financial commitments. I do think that there have been quite a few anecdotes, Starbucks had been asking for rent breaks, and larger chains are not occupying their space. They have started those communications. But then, it’s also true of smaller businesses that might only have one location. I have heard of cases where they were approached by the owner or they approached the owner and were looking for some sort of [relief].
NREI: The report mentions at-risk labor forces and at-risk industries. Expand on that, what are the main takeaways from these sections?
Eltorai: The at-risk labor force is focusing on unemployment. The way I would break it down is labor force is focusing on the employee and the industry is focusing on the employer. That’s the difference between the two. They are certainly related. Think about it this way, there are types of jobs where the business might survive, but the employee is put in financial stress. Any sort of role where the job’s hours get cut back, or the job can’t be shifted remotely, and the employer has to cut hours instead of laying off. Even though that’s beneficial and helpful to provide some relief to the employer in terms of decreasing expenses, the employee is still put in a tricky spot where if they weren’t working for the last couple of months, that puts an added financial burden at the individual level. The industry piece is really focused on the employer level, where there are a number of businesses that can have inherent risk because of the way in which we’ve been trying to contain the pandemic.
NREI: What are some important trends you see developing that are worth keeping tabs on?
Eltorai: What’s unique about the pandemic and crisis that really make up this pandemic is how important geography is. It’s really a big factor, you can see that on a national level, when you’re looking across the states, but it also comes down to a much more local level where geographies have dramatically different experiences. There are many places that have higher density that are really feeling the effects of this pandemic and this crisis much more severely than other places. There are many other states that are reading about the pandemic, but they’re not quite experiencing it to the same degree. I think that’s really going to come through not only during the crisis and be a key differentiating factor there, but it will also be very key in the recovery as well. So, I think that it has been pretty amazing to see how powerful this pandemic has been. It has reshaped certain markets, but then it has left other markets, I don’t want to say untouched, but it’s far less noticeable in other markets.
NREI: What’s your outlook about how much property valuations, in the states mentioned, might suffer compared to states that have been less hard-hit?
Eltorai: It is still a bit too early to call the specific valuation impacts across these markets and property types. However, I would not be surprised if the markets that were less severely impacted see little price deterioration compared to 2019 valuations (I even expect to see some minor price appreciation across some assets), while the harder hit markets experience valuation decreases somewhere in the low double digits.
NREI: How long might it take to gain back the lost value?
Eltorai: Our analysis of recessions over the last 50 years suggests that it has historically taken approximately 2.5 months of post-recession economic recovery to offset every one month spent in recession. For example, if this current recession was only one month long from start to end, then it would take 2.5 months for the commercial property markets to recover in terms of deal activity and pricing. However, this recovery speed is drastically slower for both deal activity and pricing when the banks and other lenders are hit hard and pull back—as they did after the Global Financial Crisis and the Savings and Loan Crisis. So, while I don't feel comfortable calling the recovery date right now, as we are still not quite out of the recession, I would say it is incredibly important to watch the lenders to see if this will be a quicker or slower recovery.