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Global Pandemic Transaction Activity and Implications for Commercial Property

3Q20 has proven that real estate transactions can continue to be made throughout a global pandemic and extreme market volatility. The following article provides valuable Green Street sector and market insights in reaction to the quarter’s largest single-property transactions, which were released in Real Estate Alert’s Largest Deals special editorial feature and discussed in a recent webinar.

Setting the Stage

Green Street has long advised that industry participants study the interplay between the public and private real estate markets, as public securities are often a leading indicator of future pricing in the private sector. More specifically, unlevered returns reveal how public market investors have repriced the different property sectors since the recession scares engulfed markets in February. Core sectors, such as apartment, office, and retail, have experienced a drop in unlevered asset value of 20% to 30%. Many of the non-traditional (or niche) sectors on the other hand, have seen flat or increased pricing.

Sales volumes in the second quarter of 2020 hit the lowest point since the second quarter of 2010 and were off by 39% year-over-year, pressed forward by the multifamily and industrial sectors. While it is difficult to underwrite assets during the Covid-19 pandemic, the recent transactions featured in Real Estate Alert’s Largest Deals list provide insight into private market pricing and strengths and weaknesses in the landscape.

Multifamily Trade and Booming Seattle Deal Activity

The largest multifamily deal currently on the list for the third quarter was the $320 million trade of the Kiara – a 40-story residential skyscraper in Seattle with 461 apartments that completed development in 2018. The Kiara traded for only slightly lower than its original whisper price of $335 million. It is apparent that there is still a close eye on rent collection, but investors are looking to the post-Covid world. A deal of this size also implies that a two-year-old, luxury apartment building in a top market is still something that investors will bet on for long-term success.

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Real Estate Alert has heavily covered Seattle recently due to the volume of listing activity. The greater Seattle market has had 14 large office deals totaling $2.2 billion on the block and another half dozen deals totaling $1.3 billion either close or go under contract since August ‘20. The velocity of listing activity in Seattle is higher than any other U.S. market throughout the same period.

Few Transactions for a Challenged Office Sector

In the office arena, there were roughly a dozen transactions of over $100 million during 3Q20, two of which were in New York – 1375 Broadway and 522 5th Avenue. New York City, as a juxtaposition to Seattle, has not had the level of deal activity that may have been expected based on historical performance. Both large Manhattan office deals were instigated pre-Covid. Additionally, 1375 Broadway had a large, preferred equity component, and 522 5th Avenue had a lengthy closing period that proved helpful to the purchaser. Overall, however, decreasing demand for New York office space continues to negatively impact the sector.

Another noteworthy 3Q20 office transaction occurred in the Bellevue tech market, where Facebook acquired a property that was originally intended to be the REI headquarters. This transaction illuminates how two successful companies can take different paths as they prepare for their workforces to work from home (WFH), as REI and Facebook made antithetical bets. REI evidently felt it no longer needed the space while Facebook, which also expects up to half of its workforce to ultimately WFH permanently, took on the space while it stays in growth mode. This is an interesting lens into the debate on whether WFH – one of the biggest disruptors to come out of the Covid pandemic – is a permanent shift. Green Street’s research team expects WFH to reduce office demand by approximately 10% to 15%.

Industrial Benefits with Amazon Driving

One property type that has proven more resilient during Covid is industrial. The public market judges that the sector’s unlevered value has grown by 3% since the beginning of the global health crisis due to increased reliance on online shopping. At the asset level, whether Amazon is a tenant of an industrial property can meaningfully impact transaction activity. The ecommerce machine - which is expected to grow its footprint 40% this year to 241 million square feet in U.S. industrial space, according to a logistics consulting firm – has placed landlords with Amazon as a tenant in an appreciable spot.

Retail – No News is Not Good News

The most noticeable point about retail on a list of large transactions in the third quarter is its absence. No sizeable deal closed, and the pre-existing challenges in the retail sector have only accelerated. While well-located, needs-based retail continues to be perceived as somewhat Covid-resilient and is still of interest to some buyers, the sector is difficult to underwrite. Green Street’s research team anticipates Covid to pull forward several years of retailer fallout, thus detrimentally impacting asset values.

3rd-imageDistressed Lodging on Clearance

Nearly all recent hotel transactions have displayed distress features. The pandemic has created opportunities to buy properties at a tempting discount. Last month, Magna Hospitality Group acquired 60 West 37th Street from Ashford Hospitality Trust for $115 million, which was approximately 40% below the January ‘19 trade. This deal exemplifies that there are still buyers for New York hotels but primarily with buyers experienced in the market.  In fact, market pros told Real Estate Alert that Magna has raised an unspecified pool of equity to target non-union hotels in the city. Though the pipeline of hotel deals is not yet robust, Green Street expects to see more distressed lodging assets hit the market over the next 12 months.

Context is Key

Emerging trends and transaction activity are key to forecasting operating fundamentals and valuation across sectors and markets. Green Street’s News product suite ensures readers have an edge through early-warning insights on risks, opportunities, and behind-the-scenes dealings in the real estate space. The four weekly News publications – Real Estate Alert, Commercial Mortgage Alert, Asset-Backed Alert, and Hedge Fund Alert – deliver exclusive information that has not been published elsewhere. Green Street’s comprehensive web-based platform, which now encompasses exclusive news, trusted proprietary databases, interactive mapping analytics, and a plethora of top-quality public and private market research, offers a powerful one-stop-shop for actionable commercial real estate intelligence to drive better decision-making. Sign up for a free trial of News or contact our team for a demo of Green Street’s platform.

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