Commercial Real Estate

What Does the Current Economic Situation Mean for Commercial Real Estate Investors?

Expertise: Personal Development, Commercial Real Estate, Real Estate News & Commentary, Landlording & Rental Properties
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While the stock market has plunged and rebounded since the onset of the coronavirus pandemic, real estate investors are watching and waiting with bated breath to see what implications the first half of 2020 will have on the housing market. Thus far, residential prices have remained pretty steady, but many expert investors predict that will change.

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Only time will tell what will really happen to residential prices, but another sector—commercial real estate—is poised to be even more significantly impacted by COVID-19-induced temporary shutdowns, as well as mandatory operational changes even as lockdowns are lifted.

So, what does the current economic situation mean for commercial real estate investors?

I HAVE ALMOST NO IDEA!

Even the World’s Most Successful Investor Has Made Missteps in 2020

As a commercial real estate investor, I should really know the answer to this question. But let’s be honest… before this is over, this whole mad unprecedented mess will make a fool out of everyone who says they know.

Even our "friend" and investing mentor, Warren Buffett, apparently made one of the more significant mistakes of his career in the early months of this crisis. Buffett has not made many large equity purchases in the past five years, but one group of stocks he invested in heavily was the airline industry.

Now, I can’t say that investing was a mistake in itself. Because who could have predicted the current situation? Who could have guessed that a person’s meal (or lab) in Wuhan, China could have shut down airline travel and the rest of the world’s economy?

Besides, the way to evaluate a good or bad decision has much more to do with the process one uses to make a decision rather than the outcome. The outcome is subject to so many unpredictable and random effects that I find it is better to ask myself if I went through the appropriate due diligence up front. And we know from over six decades of his personal history that Warren Buffett did that due diligence in these purchases.

Related: Why the Wealthy Put Their Money Into Multifamily & Commercial Real Estate

Anyway, Buffett revealed in his 2020 annual investor meeting in early May that he sold off his stakes in four airlines in the midst of COVID. This was his apparent mistake.

What has happened to those stocks since he sold them? CNBC reports that calculating from the dates that Berkshire completed selling shares of each airline, as listed in SEC filings, American is up 64%, Delta has gained 54%, Southwest is up 27%, and United has increased by 53% as of the first week of June.

Buffett obviously has a long time period in mind when he makes decisions like this, and we should check back in a year (or a decade) to see if his decision paid off in the long run.

Now, what were we discussing anyway?

The Investment Outlook of Commercial Real Estate in 2020

That’s right, I was talking about commercial real estate investing in the current crisis. And like I said, every forecast, including mine, will be wrong. We just don’t know how far off they will be in timing or magnitude. So while I don’t want to make specific forecasts, I will offer some suggestions here for your consideration.

tan mixed use building with neon sign advertising psychic and fortune telling

Beware of a W-shaped recovery

We all hope for a V-shaped recovery. But a V-shaped recovery is the first half of a W-shaped recovery, and that first “false” bottom could cause misplaced optimism that results in investors overpaying for assets.

The current release of pent-up demand will undoubtedly cause a quick upward shift. But will it be sustainable? The delay of a medical solution and/or a virus repeat could cause the W-shaped effect on Main Street. But the emotional state of investors will likely be the ultimate driver in a market up or down, especially on Wall Street.

I can also imagine a partial V-shaped recovery followed by a drawn-out L-shaped recovery for a large part of the economy. This could look like about 60% to 80% of the jobs being restored quickly while the remainder take years to get back to work.

Look for unprecedented buying opportunities at the right time

Study the timing of the GFC (Great Financial Crisis). There was a significant lag between the cracks in the ice (2006 and 2007); the bottom of the equities markets, which coincided with the highest number of foreclosures (late 2008 into 2009); and the bottom of real estate prices (Q4 2011 to Q1 2012).

This is the time for patience. This is the time to build yourself, your team, and your tribe. You have time to prepare.

Don’t waste it binge-watching another Game of Thrones season. I’ve written about this before.

Be ready to be somebody’s hero

There are going to be a lot of people losing their properties, a lot of banks who don’t want them, and a lot of investors who want to get in on this. Many investors are already sick of the Wall Street slot machines and will be looking for answers that you will be in a position to provide.

Specifically, in commercial, you may be in a position to buy distressed debt and provide a solution for distressed owners by giving them a path to work out their payments and refinance. This serves local banks and your investors, as well.

And in residential, learn to do subject-to deals and lease-option sandwiches. This is a huge win for property sellers, tenant-buyers, banks (made of stockholders), and you.

Related: How to Determine Residential and Commercial Property Values (and Why It Matters!)

Look for an acceleration in both the life and death of certain sectors

Malls and other retail were already in trouble. In 2019’s boom economy, we saw about 12,000 retail closures. Now we’re watching this accelerate with the bankruptcy of JCPenney, Nieman Marcus, and more. Shared office businesses like WeWork were also in trouble, and their demise may be accelerated.

Conversely, data centers, e-commerce, self-storage, and mobile home parks were on the rise. They are now flourishing in this mess, and I expect that to continue.

Think outside the box and look for repurposing opportunities. What about converting malls and their parking lots to self-storage or data centers? Or converting hotels to senior living? We’ve already seen that big box retail can be profitably converted to self-storage, and I expect this to continue.

Similarly, look for demographic shifts to accelerate

Millions of people were already moving out of locations they disliked to get to where they want to live. For example, there was already a mass exodus from California to Texas, Colorado, Idaho, Utah, and more. I’m guessing the work-from-home trend coupled with the time people have had to reflect on their priorities will result in a lot of accelerated movement.

Brandon Turner moved to Hawaii years ago. And another big BiggerPockets syndicator just confided to me that he is leaving the big city to move to a large tract of land to create a family homestead in a southern state. I’m tempted to do the same.

One size won’t fit all locations

Commercial and residential properties will perform much better in some geographies than others. Places in Utah, Idaho, and Texas are predicted to fare better than some northern locations like Orlando and Las Vegas, which are both heavily dependent on tourism.

The sand states of Florida, California, Arizona, and Nevada almost always swing wildly in good times and bad. But don’t write these locations off. If you time it right, these can be the best locations for the deal of a lifetime.

I'm personally zeroing in on Sanibel Island and Fort Meyers, Florida, favorite travel destinations for my family, to pick up deeply discounted single-family rentals on a subject-to basis. The wild swings help the informed investor (the BiggerPockets crowd) while crushing the uninformed, who bought high and will sell low or hand their properties back to the bank.

Don’t generalize on either asset type or location.

Related: 5 Major Advantages Commercial Space Has Over Residential Property

Expect a continuing gap between seller and buyer expectations

Sellers are still hoping to get top dollar for their properties. Many were banking on appreciation and playing musical chairs when the music stopped in February. Smart buyers, seeing the risk of the unknown, are not paying full price right now. You can expect this will hamper a lot of deal flow.

I believe this will continue, as it does in most downturns until there is a recovery or until sellers successfully work through the five stages of grief (denial, anger, bargaining, depression, then acceptance) in their mental and emotional space. This can take a long time, so don’t expect a quick resolution here. I think most sellers are still in stage one or two right now.

Look for some puzzling results

I’m thinking about office space, for example. I can imagine a significant negative shift as thousands of companies realize their employees work well remotely. At the same time, I can imagine some companies needing more space as they spread out to observe social distancing and move to less costly, less parking-constricted locations in the suburbs.

Don’t expect the current collection results to continue

I really hate to sound like a pessimist. But current collections for all flavors of real estate asset types are going surprisingly well. Usually at or above pre-COVD levels. I can’t imagine this will continue forever, especially as government assistance wanes and the burden of long-term unemployment settles in. This is one point I really hope I’m wrong on.

Look for certain industries and jobs to come back to America

Watch for tension with China to continue to increase. Since our dependence on them could prove detrimental, I’m expecting a resurgence in some American jobs. This could benefit several types of commercial real estate.

How can you prepare for this possibility?

Be a purveyor of hope

This isn’t the end of the world. Older generations have seen cycles repeat over and over, and part of wisdom is realizing that the sky isn’t falling. I get that it will one day, but it’s very likely that this isn’t that time.

So, take a deep breath, count your blessings, be thankful for what you can, love your neighbor, and look for ways to profit in this downturn without harming anybody in the process. Some of the greatest fortunes in history have been made in times like this, and many of you BiggerPockets members will benefit greatly from the results of this crisis in the coming years.

Spread hope to the fearful in the meantime.

For someone who doesn’t know what’s coming, I’ve happily provided some guesses on what could happen. How about you?

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What do you see coming down the pike in commercial real estate, and how will you respond?

Share below in the comment section.

After graduating with an engineering degree and then an MBA from Ohio State, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a...
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    Rick Grubbs Rental Property Investor from Salisbury, NC
    Replied 7 months ago
    Thanks for the good article! I appreciate the tone of humility I hear as opposed to those who are so sure they have it all figured out! One thing I believe is an almost certain outcome is inflation. Our government has had to print trillions of extra dollars to fund these relief programs and new entitlements. That can't happen without long term consequences. I don't think it will happen right away because we are still in recovery mode, but it will have to happen at some point. It is just math. For real estate investors, I think the best hedge is long term fixed mortgages. When inflation comes rates will rise. Right now you can get 30 year fixed on multifamily over $750k for 4%. Buy apartments with that type of financing and you will be paying back in 10 years with dollars that are a lot less valuable than today's dollar. Inflation will also mean that your property should increase in value in concert with the rate of inflation. The Bible tells us that wise people will see danger approaching and take preventive measures, but simple minded people keep going like they have been doing and suffer for it. Proverbs 22.3.
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Rick: Thanks for your comment. Yes, that is an item that I could have easily added to the article. I don't see how we can avoid inflation in the long term as a result of all that is going on now. And I agree with what you said about LT mortgages. Well said. And thanks for throwing in the perfect Scripture for this present situation.
    Mark Beeson Rental Property Investor from Wichita, KS
    Replied 7 months ago
    Thanks Paul. Excellent article and it makes sense. I want to buy now, but it's scary. Will I miss an opportunity in a market that is out of control and full of optimism, or do I wait for bigger opportunities that may come our way? Good questions! Your insight is appreciated. I'm going to buy right and make sure I can thrive in either case!
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Mark: Thanks so much for your kind comments. Like Warren Buffett says, it is a no called strike game. You can't lose (except in opportunity cost) if you don't swing. I agree that if you discount the revenue deeply and it still works well, then hopefully it will be a win either way.
    Laura Tokgozoglu Rental Property Investor from Catonsville MD
    Replied 7 months ago
    Thank you for the great article!
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    I appreciate that, Laura!
    Michael Doherty Real Estate Agent from Hartford
    Replied 7 months ago
    Great article Paul, well written. With rates as low as they are, it does create a great buying opportunity for investors. There will always be uncertainty in the Multi-Family world when it comes to renters paying on time, but that's why we screen with credit and background, right? The fed forecasted inflation to remain low, 1%-1.5% into the next year but most certainly will have to increase in the near future, like Rick said, basic math. From a 'recession' proof standpoint, what are you more bullish on right now, Mobil home parks, Multi family or Self storage? Thank you again for another great article.
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Thank you, Michael. In order, I like Mobile Home Parks, then Self-Storage, then Multifamily.
    Deeandrea Burgos from Baltimore, MD
    Replied 7 months ago
    Omg this was such an insightful article! Thanks!!! Especially as a fairly new investor where I need to really spend more time building reserves but was thinking that we are at the bottom and I need to get in quick into a deal!! Thanks for the article!!!
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Deeandrea, Thanks so much for your kind words. I am glad this was beneficial and I hope your journey from here is due north.
    Andrew Jurinka Rental Property Investor from Portland, OR
    Replied 7 months ago
    Under normal circumstances Buffet may have been right to sell. With the government stepping in to backstop these businesses it changed the rules of the game. We'll see where these companies are years from now. Many had borrowed to boost share prices through buybacks. Now they are saddled with huge debt. The government debt will only make it worse. Lastly, many of these airline stocks are being bought because people see that they have fallen so far and can only go up. That's not the way the world works when it comes to paying the bills.
    Andrew Jurinka Rental Property Investor from Portland, OR
    Replied 7 months ago
    ... and in the context of real estate. We are seeing the government stepping in to backstop individuals with free money. When will it end? Not sure. But if you received rent this month from a tenant that is unemployed and in a unit you own, be thankful and "hope" (as Paul suggests) that the jobs return!
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Thanks Andrew! Great thoughts.
    Derwin Smith-Bishop
    Replied 7 months ago
    You unleashed some informative advice in this article. I enjoyed the ten minute read. There’s one line that stuck with me, “ look for ways to profit in this downturn without harming anybody in the process.” Well said. I’m a novice when it comes to real estate investing. However, I’m currently in the process of educating myself first before I do any deals. What advice can you give someone who’s a beginner at investing in real estate? What niches do you consider that may coincide at a novice experience level during times like this? Cordially, Derwin
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Derwin, Thanks for your comments. I would highly recommend that you look at doing "subject to" residential deals and perhaps "lease-option sandwiches," which is closely related. You can learn about these types of deals from BP author Chris Prefontaine and from his book, Real Estate on Your Terms. Brandon Turner's book on no money down real estate explains these methods as well. Check out my next BP Live session on June 20th (most likely) as well, which will probably cover this issue as well. I talk about it almost weekly.
    Leon G.
    Replied 7 months ago
    I am in the rental unit business, I tried once to get into commercial and I am so glad I did not (did not get a loan). I am absolutely confident I would be suffering right now with the property I was planning to purchase. My view in the Commercial RE side is that it will just fall from here; I just see the trend of people not going out as much (regardless of the virus), people able to work from home, smart companies allowing employees to work from home (who wants to pay unnecessary rent???), doctors doing their job with telemedicine, people ordering everything (even restaurant food) online and of course; Amazon, Chewy, Ebay, Wayfair, etc . The only two commercial sectors that will be strong in the future are storage and warehouses, but even those will suffer as the once coveted frontage properties start going out of business I can just assume the frontage will be used for storage. After all, frontage is not suitable for residential (car noise) and the only good use besides retail will be to store stuff.
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Leon. I understand how you feel and you may be right in many ways. I hope not, but I believe your thoughts about retail are already coming to pass.
    Christopher Berggren Rental Property Investor from Pittsburgh, PA
    Replied 7 months ago
    Hey Paul How does a subject-to work? Is that where, as an investor buyer, I agree to buy the property "subject to" my paying off the mortgage? Is that a way to buy multi-family properties, or just single family? I've also had my eye on SW Fla because of the recent growth in employment (which I hope is diversified, not just retail and services). Kind regards, Chris B
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Hi Chris, Brandon Turner describes this in his book on no money down real estate, and you can read about it in the book "Real Estate on Your Terms" by BP Blogger Chris Prefontaine. You buy the home but leave the original owner's mortgage in place. You may place the property in a land trust along the way. You continue to pay their mortgage and you don't need to get debt in your name. It is a great way to amass a considerable real estate portfolio with little out-of-pocket cash or debt. It works well for single family. I don't know if it would work for multifamily above 4 units because that is a different type of loan. Let me know if you find out. And let me know if you come across deals (down the road) in SW FL. I think we we will some.
    Harry Looknanan Jr. Rental Property Investor from San Antonio TX
    Replied 7 months ago
    Very well presented Paul. Interesting you mentioned Fort Myers. I lived there during the Great Recession, and you are absolutely right! Very good market. I would also look further north of there-Port Charlotte and North Port. I too am looking there.
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Harry, Thanks for your kind comments. I won't be on the ground in those locations, so please keep me informed on what you see there. Feel free to connect.
    Dave Rav from Summerville, SC
    Replied 7 months ago
    Excellent 30,000-foot view and summary of the macroeconomics, as well suggestions for future trends in various industries and settings! Many of us can learn a lot from this post
    Paul Moore Investor from Lynchburg, VA
    Replied 7 months ago
    Thanks Dave! Very kind of you.