Unless you’ve spent the year 2020 and beginning of this year hiding, far from the outside world and any news media, you must feel like this seemingly downward spiral is neverending.
Globally, COVID affects every individual and industry, and it’s especially kicking the Commercial real estate industry where it hurts. Hotel occupancy dropped in March of 2020, and today, hotels are operating at minimum capacity. Retail lease payments were impacted due to little or no business compared to office lease payments, which were primarily unaffected, with 80%-90% still paying on time. The net result is that for many, CapEx spend has halted.
A Q1 2020 REIT investor reported that “close to $600M of previously announced CapEx spending in 2020 would be deferred. One office REIT in the top ten of market value announced in Q4 2019 would spend approximately $500M on development and repositioning to earn a 5-7% yield. At the end of Q1 2020, it announced it would put $73M in “discretionary CapEx” previously planned for the rest of 2020 on hold.”
When we delve deeper and look at the States’ commercial buildings, most CapEx budgets were being spent on improving existing assets, such as replacing worn-out and obsolete equipment and repositioning them to increase rent occupancy.
Commercial real estate owners were faced with hard decisions having to choose between investing in more of their existing assets, forgiving tenants’ rent, or ensuring debt service payments were paid. All and all, it was looking grim.
Moving forward into the new year and this year’s budget cycle, commercial real estate owners will be called up to make tough decisions. The world isn’t going to change back to the way it was overnight. We are all going to have to adapt and make gradual changes. After all, when a large shipping vessel needs to change course, the captain doesn’t input a drastic steering change and expect the ship to turn on a dime; it takes several micro-adjustments in the navigation to turn the boat around.
With this in mind, here are a few questions commercial real estate owners will have to ask themselves as they move forward into 2021:
- How much of my current infrastructure is in urgent need of replacement or repair, and does it override the CapEx from 2020?
First, you have to consider where it is that you are spending most on. Is the plumbing in a property leaking and causing your tenants grief? If so, you’re going to have to bite the bullet and replace it before your tenants pack up and move?
- Who will be managing this overload of CapEx projects once construction starts anew?
Property management companies typically charge high price tags on managing maintenance work in commercial buildings. This means you will have to ask yourself if this project is something you can do in-house or if you have to farm it out to other contractors.
- How will commercial real estate balance the need for improved safety measures against further virus attacks with their backlog of CapEx expenditures?
You will have to take a deep dive into your current vendor contracts and calculate what the deliverables are, and then figure out what the financial return is for every dollar spent on CapEx. COVID will have likely impacted what vendors are still able to deliver, so you should question the vendors’ assumptions and estimated returns.
- How can owners fund capital for this bottleneck of CapEx projects?
You can begin by asking questions: What is the current cost of capital, and what is the implicit cost of your capital after the fees? With those questions answered, you can seek out financing resources that do not run contrary to the asset’s primary debt holder and incur the least amount of fees possible.
Analyst Bottom-Line
We are already in April 2021, and still, there are many lingering uncertainties. During this time, commercial real estate owners and those delving into investments have to continue to steer their investments ahead by asking themselves new questions and partnering with their vendors to make decisions based on data to flatten the CapEx curve one small adjustment at a time.
Finally, as we saw commercial real-estate become adversely affected by the COVID-19 pandemic in 2020, the market is growing and recovering now. While the pandemic has caused damage to revenues of most companies, the release of vaccinations will demonstrate staff coming back to the workplace, and the hopeful acceleration of big-scale investments by investors in the future.
