Even the least talented commercial real estate developer in the world is able to realize that the commercial real estate market is currently down, thanks to the uncertainty caused by the global spread of the COVID-19 virus. With countless businesses struggling as the economic impact caused by the coronavirus gathers momentum, there exists a downturn in the number of business tenants available for commercial properties.

The current prices of many commercial real estate properties may seem attractive, but what is the point of owning commercial real estate when there are so few tenants available to fill them? You will still have expenses such as insurance, maintenance costs and taxes, so how can you meet those expenses if your property is generating zero income?

COVID-19 or not, the commercial real estate niche has always been a volatile market, experiencing an endless loop of ups and downs. When it comes to being a successful commercial real estate developer, the question is not whether you are able to identify peaks and troughs (and if you cannot recognize the current trough then you perhaps should not be in the business!), but understanding what you need to do when they happen.

Virtually all businesses have been impacted by the COVID-19 virus, worldwide

For example, you will need to understand the type of business properties that are most likely to recover quickly once the worst of the COVID-19 pandemic has passed. For example, many hotels and restaurants have been hit the hardest because of social isolation, with people being advised to stay at home. Without customers, businesses in the hospitality sector have been forced to shut their doors, and either lay off or furlough their staff. Many businesses have been forced to close down altogether, although that doesn’t mean that they’ve simply abandoned their properties – they are trying to sell them.

Once the social isolation restrictions have been lifted people will again need places to stay and places to eat, making hospitality-related properties highly attractive at the moment, especially at the prices that are being ask for. However, there probably still exists too much uncertainty in the markets currently to warrant significant investment in this sector.

The main consideration of what the future entails is how quickly markets are likely to recover from what are unprecedented times. If you go back to the 1930s and the great depression then it took the US around a decade to recover, and then it really only did so because – as a territory – it emerged largely unscathed from the Second World War unlike many areas of Europe which were forced to rebuild from scratch. After the banking crash of 2008 though everything was pretty much back to normal within four years.

The key to your strategy depends on how much capital you have, and how much you can risk

In terms of your own response to this commercial real estate soft and down market, your investment strategy perhaps currently depends upon how much capital you have to invest, how much you are willing to risk, and how much faith you have that the markets will recover quickly.

There’s no doubt that there are many bargains that are currently ready to be snapped up, but there is always the element of risk no matter how attractive the prices may be. However, many commercial real estate developers consider that the current down cycle will be a short one. As has been displayed many times in the recent past, the business world is a resilient one.

One reason for this is that due to COVID-19 many new purchases of commercial properties have been placed on hold. This means that currently capital markets are virtually inaccessible unless they are considered to be opportunities that are of deep value. This is something that is likely to continue for the rest of spring, deep into the summer and possibly even as long as the fall. Despite this, there remains opportunities for noninstitutional or civilian sellers, especially if you have the faith that the commercial real estate recovery will take months, as opposed to years.

Successful investors in the past succeeded because they could raise the necessary capital

Many developers took advantage of inexpensive commercial property prices in the 1930s to build a significant portfolio of properties, but only because they had the capital to invest and were willing to take the risk. The term ‘risk’ in such ventures means that such developers understood that their survival would not become perilous should such risks fail to pan out. Having the capital to invest affords a developer the chance to be aggressive but still requires the usual standards of due diligence and the ability to identify both good potential deals and bad ones. There is no excuse for taking short cuts just because the price of a commercial property seems too good to pass up upon.

Another aspect of the pandemic that offers favorable news to commercial property developers is that deals that may have been in the pipeline for some time may finally come to fruition. In recent years, due to high property prices, sellers have had the luxury of holding out for precisely the price they want. This makes the actual generating income as a commercial property developer a tough process. With the world sliding towards a period of financial instability, the current owners of developments you are attempting to purchase are more likely to be willing to accept purchase prices that are more attractive to developers than development owners.

In addition, because the current market is really only fit for developers with the right amount of capital to invest, then if this describes you then you will find that the number of developers you are competing with will be reduced as not everyone will have sufficient capital to be comfortable with the risk involved in development purchases. With less people available to buy, prices tend to fall.

If you would like to discuss any aspects of commercial real estate with Hooman Nissani, the author of this piece, then please reach out here.