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“It’s important for students, professionals and friends of the program to be able to hear directly from industry – what the current opportunities and challenges are. This makes what they are learning in the classrooms alive.”
The Harbert College is dedicated to partnering with companies and alumni to engage industry and improve business practice.
Developers will be better served focusing on multifamily, office and industrial projects for the immediate future, a leading analyst told Auburn University Master of Real Estate Development (MRED) students.
Lisa Pendergast, Executive Director of the Commercial Real Estate Finance Council (CREFC), shared industry growth opportunities and problems facing various market sectors during COVID-19 through a virtual presentation on Thursday, August 20. City Builders, which brings respected industry professionals to the students, is an MRED initiative designed to provide educational opportunities to students, alumni and real estate developers.
“The commercial real estate market is under severe stress due to COVID, and that’s unfortunate because before COVID, all commercial and multifamily markets were performing quite well,” Pendergast said. “COVID has impacted hard assets like commercial real estate properties, malls and hotels quite hard.”
Pendergast added, “I believe that for some time there will be an exodus out of cities and into the suburbs (for families/homeowners),” she added. “Those who had been focused on commercial development – they’ll be doing more single-family and potentially even multifamily in the suburbs. No question.”
“There's plenty of opportunity for developers to focus not only on housing, but also on repurposing some of these big retail spaces that just aren't working. Industrial space is killing it and will continue to do so because e-commerce is not going away, especially not during COVID. The top-three asset classes today are office, industrial and multifamily; all have performed well. In contrast, retail and hotel assets are under significant pressure, and that’s reflected in loan performance.”
Why is retail down? Retail is an asset class that has been under pressure for what seems to be decades as large retailers like Sears, JCPenney, and Macy’s became ever more irrelevant and disappear. The online shopping experience has increasingly become convenient – and now with COVID safe. For some time now, shopping malls have been under significant pressure, as more retailers file bankruptcy and the mall concept overall becomes less relevant to shoppers. Unfortunately, those mall owners who looked to drive mall traffic through experiential offerings have been stymied by COVID and may continue to be so even after a medical solution materializes. Pendergast reported the retail delinquency rate for commercial mortgage-backed securities (CMBS) was around 4 percent, pre-COVID. Today, that figure stands at almost 10 percent.
“Hotel owners are under significant stress as their properties are either shuttered or running at a fraction of the occupancy rates they were privy to prior to COVID. They can only hold on for so long before mortgage lenders will begin to pursue the normal course of remedies including foreclosures.”
Why is the hotel industry suffering? People aren’t traveling as often, many are under stay-at-home orders, and many hotels are shuttered as well. The nationwide hotel CMBS delinquency rate prior to COVID was under 2 percent, but Pendergast said that figure rose to 24 percent by July. In contrast to the surge in loan delinquencies in hotel and retail, monthly CMBS loan delinquency rates for multifamily, industrial and office spaces in July were still low at 3.0 percent, 1.1 percent, and 2.5 percent, respectively.
Pendergast pointed out that the U.S. government created several programs to support various sectors of the economy and markets impacted by COVID over the last several months. However, there were no such programs stood up for commercial real estate owners. “Hotel owners are under significant stress as their properties are either shuttered or running at a fraction of the occupancy rates they were privy to prior to COVID,” she said. "They can only hold on for so long before mortgage lenders will begin to pursue the normal course of remedies including foreclosures."
Pendergast added, “… Those with loans maturing near term will be in need of refinance capital over the next 12 to 18 months and are likely to find it difficult to secure that loan near term.”
Pendergast also believes developers and real estate professionals should consider pivoting toward redeveloping commercial space and repurposing large malls. “We all know that retail as an asset class was under significant pressure even prior to COVID; now with so many tenants filing for bankruptcy as a result of COVID; it brings in to question the very survival of these entities.
“The sad part is a lot of malls went toward the experiential. The movie theaters, restaurants, go-carts, whatever they do in malls these days, that experiential focus which was helpful pre-COVID is now actually a negative because it requires that people interact and oftentimes in close range. There are a lot of mall owners that are going to continue to think about how to attract shoppers; with many now faced with finding a new path.”
When discussing what it takes to be a leader in any business, Pendergast said: “To effectively run a smaller company, I’ve learned that you have to be a role model. I come in early and I leave late. I am hoping that others watch that and do the same. And another thing, especially in these difficult times, is just do the right thing. What’s the right course to take? Oftentimes, it’s not the easier course. Most times, I’ll take that harder course and do the right thing. When you find yourself conducting shortcuts, you learn to self-correct very quickly.”
One thing is for certain -- change. “As it relates to COVID, You know what? Nothing lasts forever,” Pendergast added. “You're not going to stop grocery shopping. You're not going to stop travel altogether. You may see a lot of retrofitting of hotels, malls and offices. I don't know what those things will look like right now, but I do know that it could be very different than what we're accustomed to.”
Greg Winchester, a veteran realtor, Head of Industry and Alumni Relations and MRED Adjunct Professor at Auburn University, said events like City Builders are profitable for aspiring developers and seasoned professionals who have the opportunities to attend the seminars.
“It’s important for students, professionals and friends of the program to be able to hear directly from industry – what the current opportunities and challenges are,” said Winchester. “This makes what they are learning in the classrooms alive. There are things occurring in real time that are not necessarily in the curriculum or textbooks. For industry, it’s important to have the opportunity to reach out to the next generation of real estate professionals and developers. There’s such a demand for good talent and events like City Builders give students a glimpse into the industry and decide if that’s where they fit in their careers.”
About City Builders
Auburn University City Builders is an initiative of the Master of Real Estate Development (MRED) program designed to provide learning opportunities to MRED students and alumni, as well as real estate professionals throughout the region. These opportunities include symposiums, panel discussions and webinars that bring leading real estate professionals together to share insights and best practices for economically sustainable development projects. Learn more at Auburn City Builders here: http://wp.auburn.edu/citybuilders/.
About Auburn University Master of Real Estate Development
Auburn University’s Master of Real Estate Development program is a collaboration between the College of Architecture, Design, and Construction and the Harbert College of Business. This five-semester executive program provides experienced professionals the theoretical and practical knowledge to develop real estate projects emphasizing best practices in economic resilience and design excellence. Learn more at https://harbert.auburn.edu/degrees-programs/graduate/masters-real-estate-development/index.html.
About the Commercial Real Estate Finance Council
The CRE Finance Council (CREFC) is the trade association for the $4.4 trillion commercial real estate finance industry. More than 300 companies and 12,000 individuals are members of CREFC, with offices in New York City and Washington, D.C. Member firms include balance sheet and securitized lenders, loan and bond investors, private equity firms, servicers and rating agencies, among others.