Commercial Real Estate in the COVID-19 World

These are unprecedented times!  It is sometimes hard to find the words to describe both how quick and the depths our society, culture, health and economy has been affected over the last 60 days or more.  Looking backwards at this point in time in May 2020, it is also regretful and disappointing to see how totally unprepared, misinformed and misguided our healthcare, businesses and government systems were when the coronavirus quickly emerged and how the haphazard response has been in these early stages. Monday morning quarterbacking is never too valuable but it should be taken into account to at least provide valuable perspective in how best to marshal people and resources in the coming weeks, months and even years as misguided predictions of an initial short “V” economic downturn is now out the window as almost all health and economic soothsayers are resigned to the facts that this will be a long drawn out process of getting back to any sense of normalcy… whatever that will be. 

The difficulty right now which compounds the virus effects is that it is so unpredictable and the ramifications so uncertain and the situation and consequently future predictions seem to change on a daily or weekly basis. Our society and economy is built on being able to have some sort of verifiable sense of the conditions in the future, in the short-mid and long term which guides decisions about buying, investing and more. With so much uncertainty and now a pervasive belief that both the virus and the negative economic ramifications will be with us for some time, consumers and businesses have become much more conservative and risk-averse thus shutting down the flow of dollars and economic activity which ripples down through our very connected national and international economies especially with consumers who represent close to 70% of the national economy.

It is difficult to me to talk about the economic ramifications and then of course how it translates into the commercial real estate sector, when the US mortality rate is now approaching 70,000 and worldwide it is reaching into the hundreds of thousands. This gets reinforced when now many believe that we are in the early stages of this pandemic with more and more experts believing that a “second wave” or more will be inevitable as we move into next winter and 2021. Anyhow here we go. If you don’t want to read all this here are the major takeaways.

  • Commercial Real Estate values, along with rents too, will definitely not rise and will decline in the short term. The extent of valuation declines will depend on product type, quality, strength and type of tenants, and specific market dynamics and geography. Buyers have “paused” and pulled back as they try to evaluate values, demand, tenant mixes and more in the short term. Sellers understanding the turbulence in the markets will pull properties from the market as they see investor and user demand dry up, and if they have financial capability will wait in order to see where the market goes. There are, however, selected transactions taking place as many investors, firms and developers see a light at the end of the tunnel and space needs will rebound in the next year or so.
  • Vacancies will go up in almost all segments but again will depend on specific property type. Hospitality and retail oriented properties will feel the pain most in the short term.  Apartments will also see slowly rising vacancies as unemployment takes a toll as rent payments become more difficult over the coming months and quarters.  In-migration always a driver of the Portland market will be reduced for the foreseeable future but may revive longer term as Portland and Oregon, who have fared quite well with the virus response, may attract new residents to our “clean and natural” brand and less dense metro area. Details on office space demand will come later as economic effects will take time to ripple into this sector, and again, will be specific to what industries office users operate. Undoubtedly, firms will look to reevaluate their future aggregated office needs as remote working may become more permanent and distancing more necessary.  The industrial and warehouse market may be more resilient as uses in e-commerce, supply chains and logistics maintain their importance. Manufacturing will be hit-and-miss and will take time to again be determined by the industries and market segments in which they operate.
  • Banks and financing sources are already becoming much more cautious and pulling back loan originations, and fleeing to only the most “bullet proof” properties and clients.  Generally, loan to values will decline, debt coverage ratios will rise and scrutiny of current and future operating incomes, tenant mixes and valuations will be more intense. The same will be true for construction and development financing. Banks are still looking at deals and loans but are much more conservative.

Our regional and national economies, pre-coronavirus, were in generally good shape with consistently and historically low unemployment, low interest rates, robust stock values and healthy corporate profits. There has, however, over the last year been some more realistic economic observations that the economy was beginning to plateau somewhat as the perpetuating economic growth machine was “reaching its maximum potential” with the ability to sustain what was a 10-year economic expansion becoming constrained. This was mainly voiced by many that saw this latest prolonged expansion was spreading economic success unevenly with low wage growth, increased costs for health care and housing and under-investment in long term valuable aspects of our economy such as education, job training, transportation/technology infrastructure and more.

Nobel prize winning Joseph Stiglitz opined, “With the record economic growth over the last decade, we built an economy with no shock absorbers with under-investment in many valuable long-term societal and economic programs and systems that could strengthen the economy long-term. In was complacent and short-term thinking which where we were making a system that looked like it was maximizing profits but had higher risks and lower resiliency”.

It is an old story that everyone is somewhat guilty of being a part of, the belief the good times will always continue and adhering to the old maxim of “planning for the best but preparing for the worse” is not a worthy philosophy to follow.

Another economist chimed in, “We went from zero to 60 in the matter of weeks and really exposed the threadbare resources and planning on the part of workers, businesses (both large and small) and our local and national governments to weather such an unprecedented event”.

Ok, with all that let’s dig into how it is affecting the commercial real estate sector in Portland and beyond. I have been out talking to businesses, commercial real estate property owners, developers, bankers, appraisers and more to understand this rapidly changing environment.

Landlords are working with tenants to defer or provide various combinations of rent relief in the short term with retail and food/beverage tenants needing the most immediate help followed by apartments, and then later, office users. Landlords are banding together to press for mortgage “relief” with our elected officials as they see deferring or working with their tenants has to be met with the same flexibility by mortgage holders. Many banks and financing sources are putting short term moratoriums on new commercial real estate loans and even in some cases delaying refinancing for even their best clients and sending signals that while rates are low, more onerous underwriting will be coming as lower loan-to-value ratios; higher debt coverage ratios and much more scrutiny of property quality and tenant strength and mix will be in the cards.

Banks are generally seeing the value in keeping their borrowers healthy with loan strategies to defer payments as landlords see their cash flow in jeopardy in the short term. Appraisers are trying to figure out valuations going forward as financing sources are telling them to be much more conservative (read higher capitalization rates), as recent comparable sales and valuations are much less relevant and projected net operating incomes have to be reduced, but again, no blanket statements can be made as each situation is different and very specific to product type and quality; geography, tenant type and mix and more.

Developers are delaying projects in planning and permitting, as predicting demand is impossible and financing sources start restricting their support.

It is all over the map, and really astonishing is the lack of predictability and uncertainty of opinions and viewpoints of the depth and longevity of the impacts and the consequences that will have on the commercial real estate sector. This is a result of the rapidly changing status of the spread and severity of the coronavirus situation and its effects on the economy, and how the recent slow opening up of some states and cities will go and businesses will be able to gain back lost sales and income.

In a more micro view, the repercussions will have varying ramifications on different real estate products (apartments, retail, office, et al.) but also geographically of how certain states, cities and commercial real estate markets were faring prior, how quick and strong the re-opening up of the economy goes, and the individual make up these economies and how resilient they were pre-virus. Examples would be Seattle that was going gangbusters, and whose base is underpinned by some large and durable companies in technology (Microsoft/Amazon) and healthcare/biotechnology, versus cities like New Orleans, Miami and Las Vegas that have huge tourism, services and hospitality based sectors.

Anyhow, it is safe to say that no part of the large spectrum of commercial real markets and product types won’t see some sort of effects, and most will not be good and question and hope is that a rebound can come sooner rather than later. With some gradual re-openings in certain states now occurring, there is a growing feeling the nadir of this shutdown has been reached and economic activity will start to rebound later this year.

The coronavirus has thrown the commercial real estate world into disarray, as people empty out of offices, hotels, malls, and work from their homes.  The economic disruptions that have followed will be with us for some time and are transforming how people, manage, develop, finance, operate and occupy real estate.  First the positive.


If there is a sector in the commercial real estate world that may weather the coronavirus with only a few bruises, and in some cases may even prosper, it is warehouses and industrial real estate.

Industrial real estate has been the flavor of the month for several years now with relatively low vacancy rates, increased lease rates, considerable new development and high desirability because of its low management and simplicity by investors.

While e-commerce (Amazon will just get stronger) and the last mile of having more warehouses in core areas closer to the user will continue to grow, industrial warehouses will not be totally immune.

Overall, supply chains in all industries are being disrupted as port activity and imports have slowed considerably and traditional logistical patterns adjust. It all depends on what industries and sectors these industrial and warehouse user are operating with the necessities of life such as healthcare, food, textiles, home improvement and more may be OK, but those chains that supply firms in aerospace, institutional, auto companies, travel/leisure/hospitality and more will struggle.

Food distribution will be hit and miss, and will need to change as the channels into the grocery sector will stay strong, but a big chunk (40% of food purchases) which goes to hospitality, restaurants, and institutions, have evaporated and need to be revamped. Manufacturing changes will come later as they lag in the timeline, and again, will depend in which industries they operate. But it’s safe to say firms in the web of industries such as aerospace, transportation (mainly autos) and construction will see their demand falling over time while healthcare, pharmaceuticals, staples, information technology might be more resilient.

Anything in the oil/gas sector is slammed. Data centers and tech hardware should fare quite well as this has become an essential part of our much needed infrastructure. Portland’s industrial market was on a roll coming into this whole pandemic thing with low vacancy rates, considerable new construction, stable and strong lease rents, and substantial sales activity of both leased and user warehouses at low capitalization rates and average price in the $120-$140 psf range, which was a doubling since the last recession.  There was almost 3 million sf of industrial space under construction in the last year with over 8 million square feet of space delivered in the last six years with healthy vacancy rates, but through much of 2019 leasing was starting to subside and net absorption was starting to ebb year over year.

Leasing obviously now will drop off for the next few quarters, and I have already heard deals in progress for both leased space and buying of properties have pulled back.  One developer (they like to maintain anonymity)  I talked with had a 100,000 sf new airport-area warehouse sale teed up to a strong regional glass distributor and they killed the deal in March. Too much uncertainty.  Another developer who has a large, leased, new, industrial project (again near the airport) that was being marketed for sale, and had LOI agreed to, and was negotiating a PSA with a large institutional buyer at a sub 5% cap rate, related that the buyer backed off.

A lot of new product will see little activity through the end of the year and will need to be aggressive with the limited tenant pool, but I have seen several large food based industrial requirements out there. Subleases of space are, and will, continue to be more prevalent.  All of this, again, may be temporary through the end of the year with demand gradually picking up next year.


Ok, now for the polar opposite. All of us have seen the sudden and devastating effects the economic shutdown has had on the large retail and hospitality industries, as travel is down more than 80% and many food/beverage and retailers are shuttered or have severely reduced operations. It has been most brutal to those smaller local businesses that don’t have an e-commerce presence or have outlets into wider distribution channels and operate month-to-month.

Larger sit-down restaurant chains are in this category, too, as social distancing here is impossible. It will be a prolonged period before the consumer will feel comfortable in these more dense environments and government restrictions are largely unworkable in the short term.

Fast Food can survive with drive-thru operations, but still will be much reduced in their ability to have enough sales. Businesses in the health and fitness niche, which has become a big component of retail tenants over the last few years, are also very vulnerable because of the close proximity of people here is tough to avoid.

Many malls and shopping centers have been on the rocks for the past decade now, as e-commerce has exploded and demographics of shoppers have shunned these often sterile and uninspiring retail experiences. The virus will hasten the difficulties of many of these properties.

Grocery stores along with drug stores could be a bright spot along with cheaper retailers like Dollar Tree, Dollar General and outlet stores. Like in many product types, it is a story of haves and have-nots. The National Retail Federation showed sales in March were up at many retailer categories: Grocery/Beverage: 25%; Health and Personal Care: 6.4%, as well marginally up in General Merchandise and Building Materials. Electronics/Appliances, Furniture and Home Furnishings, Sporting Goods and Clothing were all down substantially.

Many local smaller retail business will not make it back and as they do not have the resources and strength to restart a business that could limp along for quarters.  The big boys in retail will not be immune, and weaker ones which were already suffering, will close many stores or even seek bankruptcy/reorganization. Again, it will be depending on the products they sell and how they sell them.

Hotels and the hospitality industry, which in many cities like Portland, was heading to an overbuilt situation (and are often highly leveraged), will be hit hard as they are very dependent on tourism and business travel which will not return to previous levels for some time.

Portland, with its huge food/beverage scene and fitness and health services tenants, will probably experience more negative impacts than most communities with vacancy rates which were already high, doubling or tripling in the short term.


The stability of apartment projects will take multiple months to understand the impacts. While apartment tenants nationally had a non-payment rate in the range of 8-15% in April, it varied widely and was mirrored in the Portland market with similar survey results. Again, it is all over the map with some projects seeing very little rent issues with others seeing 20-30% of tenants having problems, and obviously is a function of their tenant mix, locations, rent levels and their tenant’s employment status.

May will be much difficult as tenants resources diminish and unemployment ripples through the economy. Larger landlords and property owners are looking at multiple rent abatement strategies, and are on a case-by-case basis, but know they have to communicate and figure out interim logical approaches to keep their tenants as long as possible, as new tenants to replace them are hard to find.

Additionally, those projects in lease up are seeing very little traffic for new projects, but it again varies as one large national developer with several projects in lease up and coming online related, “We have been of course doing virtual tours and have seen one project on North Interstate actually getting traffic, and we have done several new leases while our newer project in close in Northeast has been very slow. It is hard to understand what the reasoning is and how to adjust rents, marketing and incentives to achieve leases.”

There are another 1000 units of apartments coming on line in the core of Portland this year and early next, and they are plowing ahead as financing/equity were secured years ago, and trying to stop construction and development in process is like getting a river not to flow and can be very expensive to stop and start later. Some of these developers are hopeful that when these new projects hit the market that market forces will come back into balance somewhat. Me too. Incentives for new leases which were already present, especially in higher end units, will have to grow and selected rent price adjustments will need to be made. Developers, contractors and everyone along the chain involved in new projects (architects, engineers, suppliers, et al) are lobbying the city to take actions to regarding facilitating permitting, limiting city fees/charges and more to keep the housing pipeline moving. Rumors also abound that the city may provide additional time of up to three years for projects that were vested pre-Inclusionary Zoning, but have or will have that vesting expire. A smart and needed move.

Sales of existing apartment projects have taken a hit as buyers and sellers trying to figure out how to make deals work and financing becomes more cautious with higher down payments, more loan coverage and much more conservative appraisals and valuations. Some deals are going away and others are being renegotiated. 1031 cash buyers are still out there but will most likely will be looking for price reductions or better terms. Many seller and buyers are just pushing the pause button if they can wait to see how the next few months will go and revisit sales and purchases when the data is more understandable.

One bright spot is affordable housing which is chugging along. With the big $650 million Metro bond money being approved in 2018 finally hitting the market, affordable housing developers are submitting projects and sites for funding. Clackamas County, City of Gresham and Washington County all have all put out RFPs for projects and funding of close to $150 million this spring with the hope of getting close to 2000 units going in the coming 1-2 years. The city of Portland and the Portland Housing Bureau, with a $200 million allotment, will come later this year with their funding priorities and project solicitations.


Demand for office space, both this year and into the future, is really the most puzzling of the commercial property product types.  Many businesses nationwide, and I would say most companies in Portland, are working remotely with their offices basically shut down till June. Many of the office requirements I saw circling out in the market have paused or pulled back, but there are a still tenants out looking for chunks of space. But generally, office users will rethink their office operations, layout and density.

There are a couple counterpoint arguments on needs for office space in the post Corvid-virus world.  One is where companies will understand the value and ability of remote working to accomplish their goals, thus reducing head counts and space needs in traditional office environments.  The other is that business may need more space for each employee to provide distancing and less aggregation of workers.  The open floor plan may get adjusted with private offices being more prevalent and less common areas.  I think there will be a bit of both, but I tend to side more on the prediction that demand for both traditional and creative office space will take a hit as individuals and teams get more dispersed and work from homes. Plus many organizations will be watching dollars much more closely, so leasing space and that cost will be looked at very closely so migration to B & C product and sublease space may increase.

Tech and flex space in general should be able to weather the storm somewhat.  Then there will be certain firms that cater to certain business segments that just will not make it and will give up space. In Portland, we had some fairly large chunks of empty office space in newer buildings like Tanner Creek and Fields Office in Northwest; recycled spaces in downtown like in Wells Fargo and new projects coming on line this year with Canvas by Providence Park and Gerding Edlen’s 5 SE MLK.  These buildings and empty spaces in general should not see much, if any, activity through the end of the year and undoubtedly there will be a rise in vacancy rates as new product hits the market and certain tenants size down or give up space.

Subleases opportunities will rise. Office rates will stay the same for the near future but landlords will look to be more aggressive on free rent and TI dollars, but only for stronger tenants.  Landlords will need to understand measures to offer tenants to make them feel safe in this new work world around issues such as sanitation, distancing, janitorial, security etc. As one developer asked, “How do you get separation in an elevator?”.

Office investment sales, which were gaining momentum in Portland the last couple of years, will be in the refrigerator for this year and probably next as buyers try to better understand valuations and the resiliency of the real estate and the tenant mix.  I heard 200 Market and KOIN Center downtown were pulled from the market as the buyer walked away at the last moment on the deal for the creative office Olympic Mills in the Central Eastside.

New projects, and there are a few that are in planning, design, feasibility, will be put on the shelf, but one developer optimistically said “If you bring an office building online in two or three years and we get back to normal, and existing space gets leased, you may be in good shape as the only game in town”. That is one ballsy assumption, but I like the positive thinking.

The office market in Portland is somewhat safe for now, but really in limbo as many office tenants wait to see how this abrupt jolt to our economy ripples into their businesses and how they need to adjust their overhead and headcounts to meet their new income levels.  It will take a quarter or two for this to become more transparent.