Covid-19 Impacts on Real Estate

In these challenging days, constant but digestible data and insight are essential for conducting business-as-the-new-usual. This note is our first in a future series of semi-weekly Tuesday / Thursday communications to a small group of investors active across the Metro Washington, DC commercial real estate market.

Through these, it is not our intention to highlight the negativity around the market, but the reality of the market must be presented real-time so we can optimally shape recovery strategies that deliver success for you ahead.

Weeks into societal shifts that have caused a cessation of global activity and 10 days into a regional shutdown, a new temporary normal has been established. Yesterday, the U.S. Senate and White House responded to these fast-evolving developments by sending a bipartisan $2 trillion emergency bill to the House. This legislation aims to support a tested healthcare sector, a weakening economy and a fragile workforce.

Whether the focus of that bill is aptly targeted or substantial enough will be debated and tested for weeks, but the bill’s historic significance parallels quick and drastic corrections across the Metro Washington, DC marketplace:

• The movement of people and goods has dropped to unprecedented levels, indicative of the 81% drop in Metro train activity compared to the historical daily average. Further, January Dulles Airport cargo volume was down 11% year-over-year in January and estimated to further slide in coming months based on an evolving supply chain.
• Office leasing for Q1 2020 is the lowest on record dating back to 2000, more than 500,000 sf lower than any prior quarter over that timeframe, 40% below Q1 2019 levels and 39% below the median quarterly average since 2000. Tour volume, which is down 87% in recent weeks, forecasts likely April-May leasing declines before a v-shaped spike occurs in a summer+ recovery.

Office sales activity has halted with March 2020 volume down 79% year-over-year and on pace for the slowest March since 2002, while Q1 2020 volume was 38% lower than that of Q1 2019. Stay-in-place orders from local jurisdictions will impact both the 14+ million sf of office product currently on the market for sale and the 8 million sf in the sales pipeline due to both enhanced challenges in the due diligence environment (touring, underwriting) and some banks taking a 30-45-day pause on lending until certainty returns.

• No jurisdiction has shut down construction sites, but the 9 million sf of office product underway will see lengthened development timing for numerous reasons. Among those: labor shortages due to worker precaution / sickness and jurisdictions altering the review timeframes based on a public-sector work-remote environment. In what could be a positive for developers / investors, some will slow development based on an increasingly favorable environment where they can renegotiate material pricing and talent costs, while having access to an expanded labor pool.

The above is unprecedented and difficult to digest for all of us, but challenges will create opportunities for those proactively positioned; we want to ensure you are prepared for these opportunities as they will return.

In these notes, we will do our best to highlight green shoots that go against the grain and present opportunity for some here. In fact, the lobbying sector downtown has countered the overall market in the past 10 days: registration activity was up 62% in the beginning of this week vs. last week. Further, 26% of new registrants were on behalf of healthcare companies with 55% filed by industries that could grow from the pandemic (healthcare, IT & communications, digital entertainment) vs. 45% that will be challenged by the pandemic (travel & transportation, leisure and local economic development).

While this is a small hint of increased activity, the region, known for its counter-cyclical nature compared to other geographies, will see more of these ahead compared to peer markets. Remember that the federal government does not sit idle in times like these, but rather the opposite, driving the recovery, indicative of yesterday’s actions by the Senate. If you recall in 2009 and 2010 when recovery was seldomly mentioned nationally, the Metro DC office market comprised more than 70% of occupancy gains nationally.

We look forward to our continued partnership as we overcome this, together.

For more on the virus’ potential #CRE impacts, read the latest briefings on our
Avison Young Resource Center