Two Tales of One City

by Alec Pacella for Properties Magazine January 2022

The dust has finally settled on 2021 and, for better or worse, it looked a lot like 2020. It’s that “better or worse” part that will be the focus of my annual wrap-up column.

I’ve used this theme a few times in past columns, sometimes I termed it “best of times, worst of times’ while other times I called it “glass half full, glass half empty.’ As has been said several times in the recent past, COVID has accelerated trends that were already present and the concept of ‘better or worse’ is no exception. To see what fared better and what fared worse, read on.

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Record rents point to UK CRE recovery

Reporting in the Evening Standard, based on data from Remit Consulting, indicates improvements in the UK’s commercial property sector. The firm’s data shows that rent collection in the last quarter reached its highest level in the pandemic period, which is partially due to the easing of lockdown regulations in the country.

Data from their REMark Report shows that “…an average of 72.1% of rents due in the UK had been collected with seven days of the September quarter rent day, which covers payments for the three months ahead”. This includes rent for retail and dining establishments, bars, and warehouses. Comparatively, in the previous quarter, 66.5% of rentals due were collected by the same point. Retail rents were sitting at 68.8% (up from 62.3%) and leisure at 57.2% (up from 40.1%).

Good news…

This is in keeping with a general upward trend, the firm told the newspaper, “which is good news for investors and landlords such as pension funds and other institutions, particularly as the upward trajectory of payments from tenants is similar to the previous quarters of the pandemic.”

…but not all good

Despite the strength of this news, it’s not a unilaterally positive picture, as the data also indicates that this ‘record high’ is still considerably lower than pre-Covid levels. Altogether, since the start of the pandemic, there is a shortfall in rent from commercial occupiers amounting to nearly £7 billion – a considerable chunk for property owners and investors, including institutional investors such as pension funds.

Managing the fallout

The matter of the “missing rents” is something the industry and public service are keeping a close eye on. This report from the International law firm Morrison & Foerster LLP gives an excellent rundown of the public consultation that the UK government has done around trying to establish a way forward for both struggling commercial tenants and landlords.

The policy paper published in August 2021 can be found here, and outlines the government intentions to “legislate to ringfence rent debt accrued during the pandemic by businesses affected by enforced closures” and their intent to formalize a “process of binding arbitration to be undertaken between landlords and tenants”.

Meanwhile, a number of the large and influential property industry associations have called on the government to end the moratorium on evictions that came into effect during the height of the pandemic and lockdown measures.

Health check: the state of hospitality and hotel CRE

An economy reconfigured

It’s been a rollercoaster 18 months for everyone including market analysts who have had to provide insight and predictions on an unprecedented event, as the world bounded through recession, recovery, and reconfiguration. As it stands now, the US recovery has been swift, if uneven.

GlobeSt’s latest piece on this makes the argument for understanding this recession in different terms from so-called traditional ones, writing: “The COVID-19 recession was not caused by monetary factors, rather it has been a disruption akin to an unanticipated natural disaster which typically temporarily interrupts economic activity while leaving intact the underlying demand and supply of goods and services.”

Outlook

The above forms part of their outlook reporting for hotel sales, and as has been well-established hotels, tourism, and hospitality were dramatically affected during the peak of the pandemic travel-bans and “shelter at home” orders.

GlobeSt points to some encouraging signs, including the volume of startup businesses launching, low levels of household debt-service burdens (in relation to net income), rising house prices, increases in personal savings, and the Dow Jones Industrial Averaging gaining some 18% compared to Feb 2020 (a pre-pandemic peak for the index). Altogether, these are positive signs that the American consumer may well have additional discretionary spending in the coming months, and the tourism space could be on the receiving end.

Corporate travel is expected to increase in the second half of the year, on top of the increases already evidenced in daytrippers and weekend travel. As schools reopen, they are anticipating patterns to shift from leisure to work trips.

Early 2021 winners

The Wall Street Journal reported earlier this year that real estate investment trusts (REITs) and companies with holdings in retail and hotels “mounted a first-quarter comeback”.

“Real-estate investment trusts overall rose 9% during the three months, beating the S&P 500’s 6% gain,” according to data-analytics firm Green Street. Fueling the REIT rally was an 18% rise in the shares of lodging owners and a 32% gain by mall owners.

Creative strategies
Additionally, according to CNBC, distressed hotels were in demand from buyers looking for possible redevelopment and conversion projects, and other creative solutions to the low supply of affordable housing. “So-called Class C housing stock is now 96% occupied nationally and 99% occupied in the Midwest, according to RealPage, a property management software company,” CNBC writes.

And for hotels with no intentions of conversion – the vast majority – the pandemic also provided a kind of reset that allows for model innovation. “Similar to the airline’s ala carte approach, the hotel industry is attempting to move guests toward an opt-in choice for various services, such as daily room cleaning,” reports GlobeSt.

Counting the deals
This article provides a deep dive into specific deals and statistics from hotel sales and performance in 2021 so far and is a recommended read for those CRE professionals servicing the submarket.

It will also make for interesting reading from a capital markets perspective as it details funding activity: “As the U.S. hotel industry continues to emerge from the carnage induced by the global pandemic, an abundance of capital is beginning to fuel increasing activity with lodging sector mergers, acquisitions, and spinoffs,” they wrote.

CRE outlook stronger despite supply chain challenges

Since April 2020, the National Association of Industrial and Office Properties (NAIOP) has been keeping track of the pandemic’s impact on CRE with their regular COVID Impact surveys. NAIOP’s June 2021 survey collected data from 239 US-based members, including brokers, building managers and owners, and real estate developers. A recurring theme in this latest survey was the increasing challenges commercial real estate (CRE) is navigating associated with supply chain disruptions and materials costs.

Supply and delay
With more than 86% of developers reporting delays or materials shortages, it seems the impact of COVID on supply chains is set to become one of the longest-lasting effects of the pandemic. Adding to difficulties, 66% of those surveyed reported delays in permitting and entitlements, a figure that hasn’t changed since June 2020.

Fixtures and equipment for stores are also in short supply, with order backlogs stretching into months for some retail sectors. While this isn’t necessarily surprising, given setbacks in manufacturing in key suppliers such as China, the CRE market shows promising signs of being on-track for continued recovery nonetheless.

Development despite setbacks
Despite the issues highlighted in the report, the survey still showed an increase in retail prospects. New acquisition of existing retail buildings was indicated by 39.1% of respondents, while 31.3% mentioned new development going ahead. Both of these figures represent a strong improvement from a previous survey in January. Deal activity was also noted to be on the up, with figures doubling for office and retail properties over the course of a year, and industrial deal activity increasing over 20% since June 2020.

“Bricks and clicks”
International industry players have also noted that, though larger spaces are still facing delayed rental uptake, 20,000-30,000 square-foot sites are garnering increasing interest. The potential for these spaces is as part of a multichannel retail/warehouse approach – the “bricks and clicks” strategy. As the demand for online retail increases, logistic assets, and storage spaces become more valuable, contributing to an overall uptick in both virtual and brick-and-mortar marketplaces. 

A promising prognosis
Even with the supply chain challenges facing the industry, the Federal Reserve agrees with the trend data gathered from NAIOP participants. In their June 2021 Beige Book, the Fed noted upward movement in industrial output and consumer demand. Though economic gains were noted to be slow, the outlook remains steady and positive.

President and CEO of NAIOP, Thomas J. Bisacquino, puts it like this: “The materials and supply chain issues are lagging effects of the pandemic, and they are affecting every industry. While the pandemic’s impact was deep, there’s a sense of optimism among NAIOP members, with deal activity rising and an increase in people returning to offices, restaurants and retailers.”

What’s happening in… The Bahamas?

Say “Bahamas” and you probably have a mental image of cocktails on the beach – which is not a bad association at all – but there is much more to this island destination than being a vacation hotspot.

The Commonwealth of The Bahamas – the official name – is located in the West Indies. It is the richest country in the region, with a GDP ranked 14th in North America – built primarily on tourism and financial sectors (specifically offshore banking). The nation is renowned as a tax haven, with no income, corporate, wealth, or capital gains tax – a strategy that has earned them both fans and critics.

Here’s what you need to know about commercial real estate (CRE) trends and news in this region…

Travel restrictions easing

The Bahamas is one of the first countries to lift the restrictions on international visitors who are fully vaccinated. In May 2021, the new regulation became effective which means those travelers “who are fully vaccinated and have passed the two-week immunity period will be immediately exempt from testing requirements for entry and inter-island travel”. Fully vaccinated travelers must still apply for the Bahamas Travel Health Visa with proof of vaccination, at travel.gov.bs.

This is a welcome relief for the hotel and tourism sectors which is a critical part of the economy – making up some 51% of GDP – and it should provide a kick start for tourism related CRE deals that were stalled or delayed as a result of the global Covid-19 pandemic.

Thinking outside the box

The government is keen to incentivize land sales at the moment, and is using fresh techniques to promote business, such as offering discounts on land parcels to young professionals in the western area of New Providence.

Prime Minister Dr. Hubert Minnis announced in December 2020 that new development was on the cards in this region which constitutes “crown land”. “Crown land is really the people’s land, it’s not individuals, it’s the people and we just want to ensure that the people receive their land,” he said, adding that the government would promote duty-free building and automatic mortgage qualification for applicable targets of the development.

The Bahamas Real Estate Association’s (BREA) president Christine Wallace-Whitfield has spoken in support of the proposal which would put homeownership within reach for more Bahamas residents. This would also likely create development opportunities down the line which is a positive for the construction and CRE industries.

Legislation debates

On a slightly lower note, there is currently a robust debate around plans recently proposed in the House of Assembly (during the 2021-22 annual budget presentation) that the government could potentially recoup outstanding property taxes directly from the tenants of commercial office and retail properties. The Tribune reports that this would involve paying monthly rentals directly to the Department of Inland Revenue (DIR) rather than the “delinquent landlord – until the debt is settled”. A collection of prominent CRE professionals have spoken out in criticism of the proposal, and it is an ongoing matter.

Also among the budget updates were new tax provisions that would see VAT on realty transactions increasing. The BREA said that the “sector would accept the tax hike if it was accompanied by an improvement in the ease of doing business”.

These are the kind of legislative and regulatory matters that require robust local knowledge, which is why NAI Global always advocated dealing with regional experts, like NAI Bahamas Realty Commercial.