Pandemic-Driven Opportunities in the Commercial Real Estate Market

The uncertainty surrounding this black swan event caused us to lock down our communities, our businesses and our capital flows.

The ramifications of this uncertainty have been especially pronounced in the real estate industry. Stay-at-home orders and reduced capacity limits for retail stores, restaurants, gyms and other tenants have significantly impacted revenues for many of these operators. And the persistence of the new Delta variant has delayed plans to fully reopen many of the world’s major cities. This unanticipated disruption has forced landlords to re-evaluate their future plans.

An investor who acquired a property in December of 2019 would have mapped out a three-year repositioning strategy and disposition timeline. Then the lockdowns hit, and for 18 months, their well thought out strategy was put entirely on hold. What was once a 3-5 year plan has become a 5-7 year plan, requiring additional capital in a radically changed operating environment. The equity and debt lined up to finance the asset before the pandemic is likely no longer able to accommodate the new reality of an extended timeline.

The response to COVID-19 made this scenario an unfortunate reality for many viable real estate sponsors. These operators will require flexible liquidity to rebound from the operating challenges posed by the pandemic and return to a position of strength. And while there is no shortage of financing available in the market today, capital flows into certain segments of the commercial real estate industry have stalled.

Even as we move beyond the worst of the pandemic, there is still uncertainty around what economic recovery will look like for many asset classes. While logistics, industrial and life sciences have experienced and sustained a boom in demand, many restaurants, retailers, hotels, offices and senior housing centers are still struggling to attract capital – largely due to the perceived risk of weaker post-pandemic performance.

However, perception of risk and actual risk are vastly different. The blanket aversion to certain asset classes is not based on real estate fundamentals but rather on short-term market headwinds. This dynamic creates a very favorable environment for well-capitalized investors and lenders who focus on basis – or cost per square foot.

Investors who take this approach look beyond the short-term impacts of a black swan event to acquire or lend to high-quality assets at a defensive basis. A good basis provides the flexibility to wait for a recovery in fundamentals and be dynamic in pursuing a hands-on asset management strategy in a challenging operating environment.

The mismatch between revised business plans, perceived desirability of certain asset classes and availability of debt and equity financing has created unique needs in the marketplace. Where others continue to see uncertainty, risk and complexity, our basis-driven investment strategy gives us the conviction to deploy capital across the capital stack.