COVID-19 Impacts on Real Estate

These are unprecedented times, as the impacts of COVID-19 (coronavirus) continue to evolve at a rapid pace. Our Metro DC Avison Young Team has been talking with clients and taking a close look at how this impacts the regional real estate market. We are committed to you, our clients, and remain available for discussions and advice as your partners, and wanted to offer our latest insights.

As of last evening, the Mayor of the District of Columbia and the Governors of Maryland and Virginia issued shelter-in-place orders to their residents. This collective regional effort will further hamper economic activity as well as depress real estate leasing, sales and development activity through the Spring, if not longer.

In this note, we will pivot from the short-term transactional impact on the market to detailing the highlights of The Coronavirus Aid, Relief, and Economic Security (CARES) Act and its potential mid-to-long-term impact on the region once it re-opens. This legislation is roughly twice the size of the American Recovery and Reinvestment Act of 2009 with the current assistance focused on:

• Individuals: In total, an estimated $500 billion will go toward bolstering unemployment insurance and making direct relief payments of $1,200 to eligible individuals plus $500 per child.
• Businesses: The Small Business Administration (SBA) received $377 billion to make loans and grants to small businesses. These loans are meant to cover continued business operation, and notably for the commercial real estate industry, that includes rent payments. These loans can be fully or partially forgiven, essentially becoming grants for rent, payroll and other payments.
• Industries: Up to $46 billion is set aside for the most severely impacted industries, including airlines, air freight and national defense. $454 billion goes to The Federal Reserve (Fed) to make loans / guarantees and investments.
• State and local governments: $150 billion will go to aid state and local governments in their coronavirus response efforts and continued agency operation.
• Federal government: The bill includes increases of $340 billion to federal agency programs in response to the coronavirus.

 

Metro Washington, DC will feel the direct effects of the above more profoundly than other office markets. Here is our take on where this stimulus could lift activity.

Fiscal and Economic Policy: CBD & East End
Among the bill’s largest provisions is a $500 billion allocation to the Treasury Department’s Exchange Stabilization Fund. Of that, $454 billion goes to the Fed to make loans, guarantees and investments for the purpose of ensuring economic stability. More than a decade ago when the Fed’s balance sheet also skyrocketed, the Fed grew in a few CBD office buildings by more than 350,000 sf. They set aside the remaining $46 billion for aid to industries most heavily impacted by the crisis, including up to $25 billion for airline bailouts. The exact allocation of these funds is left to the discretion of the Secretary of the Treasury who has enhanced control, which could drive growth in the Treasury footprint like we saw in 2009 when TARP and a few others government functions took down more than 250,000 sf in the CBD.

Lobbying Growth: East End & Capitol Hill
As we mentioned last week, the drafting of such significant legislation will drive substantial growth in lobbying downtown. In the week leading up to the passage of the CARES Act, lobbying registrations increased 62% in comparison to the week prior. New registrants represented both industries that stand to benefit during the crisis (such as healthcare and IT) as well as those feeling the greatest burden from the crisis (such as travel and hospitality). The CARES Act is unlikely to be the last aid legislation passed in response to the pandemic, and lobbying activity around additional stimuli will remain elevated over the near-and mid-term. Companies engaged in lobbying (inclusive of private companies and not-for-profit associations) account for nearly 70% of Capitol Hill and Penn Quarter office occupancy, so elevated lobbying activity could have a measurable effect on an otherwise stagnant downtown leasing market.

Emerging market impact on Southwest, the Navy Yard & Anacostia
The SBA, HQ’ed in Southwest, has been allocated $377 billion under the CARES Act to administer small business loans. The critical importance and sheer magnitude of this mission could easily lead to short-to-medium term office space needs that will outlast the actual pandemic by several years. Also HQ’ed in Southwest, The Department of Health & Human Services (HHS) was given $100 billion for its Public Health and Social Services Emergency Fund, intended to reimburse healthcare providers for coronavirus-related expenses, as well as $3.5 billion for The Administration for Children and Families, which is also located there. Additionally, The Federal Aviation Administration (FAA) received $10 billion in funding to continue operating at airports across the country, some of which will make its way to Southwest-based FAA contractors; The Federal Transit Administration (FTA), located in the Navy Yard, was given $25 billion for infrastructure grants with more potentially on the horizon to stimulate job growth over the short- and mid-term and finally, The Department of Agriculture (Southwest) received $9.5 billion, which the Agency will use to support agricultural producers across the U.S.

Vaccine Focus: Rockville
CARES provides $8.3 billion for coronavirus research, treatment and prevention, including the development of a vaccine. Of that total, $3.1 billion is allotted to HHS, the agency that drives Suburban Maryland’s public and private life sciences sector. The vast majority of that funding will be funneled to the National Institutes of Health (NIH) and through the NIH to the National Institute of Allergy and Infectious Diseases (NIAID), which is one of a few dozen Institutes of the NIH. Historically, The NIH and NIAID are based in the mid-section of Montgomery County, which could generate growth in B-quality buildings largely off-Metro. Further, their private sector peers, bio and life science companies, which take a significant chunk of those budget dollars in the form of grants, are largely based in the northern part of the County surrounding Shady Grove. In the life sciences sector in and around there, the market is already very tight with low single-digit vacancies, double-digit rent growth in recent years and even speculative development that begun in 2019; look for near-term and mid-term demand for lab space to grow.

Defense Always Wins in the Trump Administration: Northern Virginia
Since fiscal year 2015, The Department of Defense budget has soared 32%. The passage of the CARES Act adds to that increase, with $10.5 billion directly allocated to the Pentagon and an additional up to $17 billion for industries essential to national defense such as the vast government contracting sector. The funding will help to ensure defense contract awards are not disrupted, and many contractors, especially those with healthcare and IT contracts, may see an increase in velocity compared to pre-crisis. With a significant decline in large blocks and jump in rents across the Metro-centric Northern Virginia office market, some of this demand could be pushed to non-Metro-centric locations. With the vast majority of Northern Virginia’s market focused on tech-cloud, tech-cyber and defense and intelligence contracting, activity might stagnate in coming weeks due to uncertainty, but should jump after that pause due to demand composition that is essential the national fabric of this crisis.

 

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