COVID-19 has swept through most of the United States, leaving a trail of uncertainty among real estate professionals.
Banks are hesitant, tenants are scared, and investors are floating in a Coronavirus shutdown-induced limbo that will take time to dissipate.
Both the commercial and residential real estate markets are functioning and transactions are being completed, but the landscape is stacked with unknowns. Many in the industry are optimistic that commercial real estate transactions will continue mostly apace in Portland due to the ongoing high demand for space in the market.
“There isn’t enough supply to meet investment demand in the Greater Portland Area,” says Maine Realty Advisors (MRA) Principal, Josh Soley, noting that off market deals prevail during times like this. “Long-term investors are ready for the deals and I haven’t had a second to breathe.”
Big Challenges, Huge Opportunities
Savvy commercial real estate investors in southern and central Maine that have taken a backseat this past decade and are now looking for purchase opportunities. For many companies with generational outlooks, this could be the moment for which they’ve been waiting. Fear, paired with historically low interest rates, creates an opportunity-laden situation.
“Despite the volatility in the market, deal-making at MRA has never been higher. There are investors that maneuver in strong markets and there are investors that exercise patience until chaos ensues. The only certainty is that the effects of COVID are temporary and our economy will rebound, as it always does.”
Far from looking at the world with artificially rose-colored glasses, Soley acknowledges the challenges this situation will present to the commercial real estate market in Maine, quickly transitioning to explain his thinking:
The commodity market is unpredictable. Investors from Beijing to Boston are liquidating their stock portfolios and are looking for places to reinvest.
Additional levels of control exist in real estate that do not in either the stock or bond markets. Portland is a safer commercial real estate market, compared to other commercial markets during this pandemic.
“Contrary to what’s going on in the country as a whole, high-level investors are moving in and saying, ‘Bring it on.’ This is what they’ve been waiting for,” says Soley.
Reality Bites…For Some
Marc Goulet, MAI, CMA, is a commercial real estate appraiser and President of Goulet & Associates, Inc. He has decades of experience as an assessor in the Maine commercial real estate industry.
Typically, prices are set by mirroring the market. “I look at properties now differently because the market is looking at properties differently,” says Goulet. “Motels, hotels, seasonal restaurants, and campgrounds will all have a different view and potential of losing summer revenue rather than a net lease medical office. How you address market conditions differs in each instance.”
As a commercial real estate investor, it’s tempting to think about timing when it comes to investing in the market, but Soley recites the popular philosophy that investment is about time-in the market, not timing the market. “People who buy right now are going to be in a strong position long-term,” says Soley. “The devil is in the details. The investor needs to analyse how the deal is structured, how the property is underwritten, and how the value [of the property] will change over time.”
Also, while Maine is something of a promised land for investors, it’s also a state with its own way of doing things. It’s important to have a broker who knows the market and the players involved. Many commercial properties in southern and central Maine don’t even get listed publicly before they’re bought, making off-market deals a fact of life and one that a connected, qualified broker should be able to offer prospective buyers.
There are very few people deeper in the trenches of the southern Maine real estate market than Goulet. As far as how Coronavirus is affecting his valuation process and the market in general, Goulet is doing most building inspections himself while his employees work from home, preferring to put his own safety at risk.
Many of the buildings he inspects (now with pandemic safety equipment) would usually be filled with bustling workers, but now he’s mostly walking around empty floors and trekking up and down vacant staircases. He’s still doing inspections, though, and deals are getting done.
“We’re seeing deals that were in the works, some are closing and some aren’t,” says Goulet. “As far as the local market goes, many believe the government’s stimulus package will go a ways to counter the negative impacts of what’s going on.”
Market Full of Unknown Factors
When will things get back to normal in the commercial real estate market? That’s going to be decided over the next year on a case-by case-basis depending on the timeframe of this pandemic, says Goulet. For example, office buildings. We’ve all been forced to work from home. Is that going to be a catalyst in the future that changes the basis of how the office market works? Are people going to be working at home now and changing office space demand?
“Market participants I’ve interviewed believe net lease and industrial properties, specifically warehouses, will be least affected. Like I said, others will be impacted much more if they lose summer revenues,” continues Goulet. “If this [quarantine] ends in a month it’s one thing. If it’s three months that’s another. Is property going to be negatively impacted and how much?” We’ll find out.
How is Goulet estimating properties today, right now? “I can tell you what stabilized income would have been prior to COVID-19, but to estimate its likely current value, I have to ask what a typical buyer/seller would do,” says Goulet. “A typical buyer would put out a contract closing in two years. A typical seller would want to sell for it’s two-year-out value today,” he continues. “The truth lies in the middle. Do I discount operational loss for mothballing the facility for 12 months, or do I discount the prospective market value estimated with a longer marketing period.”
Many questions still to be answered, but our society as a whole is getting its collective head around this COVID-19 pandemic en route to a robust market again sooner rather than later.
Residential Investment: Future Holds?
It’s a tough time to be a residential real estate investor, a landlord, or a tenant these days. So far, though, the market is holding strong and players on all sides of the equation have been working together toward a common goal: surviving Coronavirus and moving on to a better, brighter future here in Portland.
“We are working with tenants to pay less now and amortize on the back end so everybody stays whole,” says Soley. “Emergency funding due to Coronavirus is starting to get through the bottleneck will also help. When a tenant can’t pay rent, then the landlord can’t pay the bank, it looks like the government is going to back that up. The government will help the banks, banks will help small businesses, and small businesses will help employees. That’s the hope.”
For his part, Palo Peirce, a principal with I-95 Ventures, is cautiously optimistic when it comes to the effects of COVID-19 on the residential real estate market in Portland. “Our portfolio is well diversified and so far has been performing. Large exposure to dedicated student housing, retail and office [space] would worry me,” says Peirce. “COVID-19 has impacted our analysis as our underwriting metrics, such as vacancies, have risen about two percent. We are keeping cash reserves to account for the impact of potential higher delinquencies. We will continue to look at multifamily and mixed-use assets.”
I-95 Ventures is also taking the time to invest in operating efficiencies for their current properties, and, “We continue to identify several value-add properties to acquire as pricing stabilizes in the multifamily space.” Like we said above, long-term investors are looking to make deals with an eye toward the future, in this way playing a part in Portland’s post-Coronavirus shutdown economic recovery.
Peninsula Powering Through
Demand is stable in the Portland and southern Maine residential real estate investment market during the pandemic–so far.
“There is still [high] demand for quality, affordable units in the Greater Portland Area that will not be satisfied,” says Peirce. “With social distancing in place and perceptions regarding physical contact [changing daily], showing and lease signings will be delayed, but only temporarily.
“Also, residents may stay in their apartments a month or two longer than expected in order to wait out Coronavirus,” he continues. “Landlords and operators will adjust their leasing strategies to delay any planned capital improvements until late Q2 for the late summer/early fall moving season.”
Still, how financing is going to work and the market will perform going forward is obviously up in the air, says Peirce: “There is always opportunity present. However, I am unsure if the predicted wave of defaults will affect the Portland multifamily market given the robust demand and conservative lending standards. Operators and lenders are just beginning to digest the variety of programs and policies intended to help bridge this crisis.”
Trying to peek around the corner past all that bubbling uncertainty, Peirce sums up his look ahead at what may be coming for the Portland real estate market. “Retail, non-grocery anchored power shopping centers may be in trouble,” he says. “The industrial market in Portland seems fairly under-delivered, and should be able to absorb any churn. Multifamily may see a contraction from luxury product to mid-grade and higher delinquency rates.”
All in all, Portland, Maine, will survive this thing and we will prosper. It will take many disparate elements working together to navigate a successful path. There will be bumps in the road, we’ll all experience peaks and valleys, but Mainers are resilient as individuals and collectively as a state, and a brighter future awaits!