How does Coronavirus affect different real estate sectors?

Wally Smith:

A month ago the topic was entirely different and now the topics are all about the coronavirus and how that’s affecting the overall commercial real estate business. You have any broad advice or observations down there?

Rich Arnitz:
We do. There is a lot of unknown out there and there’s a lot of fear out there. And I think one of the important things to take a look at with this coronavirus is what impact does that have to do with commercial real estate and specifically certain sectors. Certain sectors are impacted more so right now than other sectors, and I thought it would probably be important for your listeners to maybe if we can talk a little bit about which ones are impacted first and which ones are least impacted right now in that. And why is that the case?

Wally Smith:
Well, and Rich, part of my job as a good host is to be an interpreter. So, when we talk about sectors, a lot of people maybe familiar with that, but just some of the jargon. We’re not talking about sections of the country or geographic things. We’re talking about student housing versus a warehouse versus a multifamily, that sort of thing. What have you noticed? What are some of the big differences in how the sectors have been affected?

Rich Arnitz:
So, just to start talking about the ones that have been impacted, the first to be impacted by what’s going on currently right now in the environment. The three big ones that stick out are hotels, malls and shopping centers have been impacted currently right now at the highest level. So as you can imagine, probably when this news started coming out in late January, early February, people stopped traveling. The hotels were getting meetings canceled, getting events canceled. The small business traveler was not staying at those Double Trees or the Hiltons and they were canceling their trips as well. That had an impact on hotels and their function as well. Now that we actually are… There’s 21 States I think out there that have mandatory stay at home. The malls and the shopping centers are completely closed. You can drive by them, the parking lots are completely empty. That’s had a big impact on the malls and the shopping centers in the sense of just running your business, paying your rent, being able to generate some type of a revenue. If you look at the gaming and casino industry in Las Vegas as well, that’s had a dramatic impact with the social distancing that you have to do as well. So, those are the sectors currently right now first to get into being hit the hardest because of the coronavirus.

Wally Smith:

Can you talk a little bit about that, Rich? What are the sectors that have been hit hard? What are the ones that have been… Are there any that seem to be–nothing’s bulletproof–but which are the ones that are tending to fare better now?

Rich Arnitz:
Yeah. So I think there’s really two… There’s a variety of different sectors here that have been impacted the least, I suppose, the best way to put it with this coronavirus, with the sensitivity. And the sectors that we take a look at over here at Ridgegate are really–there’s a four or five that we actually would work with you on doing an allocation. Multifamily is one of them. It’s not recession proof, it’s recession resistant. A self-storage is another one, as people in the sense of a downsize, a self-storage has always been a strong sector out there in commercial real estate and consistent there. Industrials: if you really think about it, if you look at these large industrial complexes who’s expanding, who’s growing, and it’s Amazon’s distribution centers currently right now.

Wally Smith:
Oh, those are fantastic.

Rich Arnitz:
Or out there hiring.

Wally Smith:
Yeah, those are fantastic. That last mile, they call it in the commercial real estate. Amazon, Walmart, all of these, they’ve got to be able to have repositories of all the goods. It’s a miracle how they accomplish that inventory control anyway. But those are fantastic.

Rich Arnitz:
Yeah. And so the industrial ones are very, very strong and there’s a couple sectors that we’re taking a look at as well for some of our clients, they’re the centers and cell towers. If you really look at those, what are we using now? We’re using cell towers right now to communicate [with] Zoom and doing these types of events going through right now. So those two are one of the fastest growing currently right now as a lot of people are doing their work on a daily basis staying at home in the sense of the data centers and the cell towers as well.

Wally Smith:

Rich, before the break we were talking about those sectors. There are some doing really well, there are some that we like, like cell towers and data centers, distribution facilities for Amazon, I think we talked at the beginning of the show about those that are getting hit really hard. Hospitality is probably…and retail are getting hit really hard. Hospitality and retail shopping are probably the hardest hit of all. Any others you want to address or talk about specifically?

Rich Arnitz:
Yeah, so hospitality is number one, hotels. So hospitalities, the gaming, the malls, the shopping centers, so the lifestyle centers and the big strip malls, the power centers as they call them. So if you drive in and you see the Home Depots and things of that nature, those have got hit a little bit. We do like healthcare. Healthcare has always just been one of those recession resistant a little bit as you look at the necessities of it. So healthcare, multifamily storage, industrial, those have always been strong anchors of of the society here with recession resistant so those are usually the last ones to get hit as well.

It’s interesting, student housing has been a strong sector, but that’s one that is kind of on the bubble a little bit because if you really think about it right now, those are longterm leases for the full school year, but a lot of people are really unsure. A lot of people are doing classes online now, so a lot of people may not be falling back and that might change a little bit next year. So it’s going to be interesting to see how that student housing sector is impacted when the kids go back to school and how their studies go.

Wally Smith:
Well I think as with anything the creme de la creme will always be there and if you have student housing, I believe, at the top universities and colleges in the country, the parents who send their kids there, they can afford it and they will sign that personal guarantee or parental guarantee, which is what’s so critical to the student housing. But I definitely agree we want to be very cautious looking at any of that sector right now and I would really be scrutinizing any of that.

You mentioned some of the big boxes. I will say some of the retail that is doing really well is where they have a strong grocery store anchor. Right now with 21 states having stay at home orders, it’s not really military rule yet, but they’ll stop you on the street and say, “Where are you going?” Out in California, I actually heard somebody said they were frisked on the way into the grocery store and I don’t know why that would be, but it’s getting kind of extreme. And again, all news is local, right?

Rich Arnitz:
Yeah.

Wally Smith:
So anyway, as far as which sectors are doing well, the grocery stores have done well so if you happen to have a grocery store anchor or dominant in a facility. Some of the retail, specialty retail has been doing okay. Those that have been able to convert.

Rich Arnitz:
Yeah.

Wally Smith:
… and they have a drive through window [which] is a gold mine for a lot of these restaurants now.

Rich Arnitz:
Yep. So if you really look at the net lease space, the Walgreens, the Walmarts as well, you have the Home Depots, you have the grocery store anchor centers like you mentioned, the places that you get your necessities. So you go from the Costco and you can go get your water and your toiletry items, your paper good items that are the hot items I guess right now people are trying to hoard up on I guess and then you go to the grocery store and get your items there as well. So those have always done extremely well and those are necessity-based. So those are recession resistant as well.