Spread Of Pandemic Could Cause A Rethinking Of Density

Much like during the Great Recession, multifamily owners could see a steady demand for their units during the coronavirus pandemic and its attendant fallout. But where will people feel comfortable living once the pandemic is over?

Earlier this week, several major banks, credit unions and other lenders raised their minimum credit score requirements, dropped Federal Housing Administration loans and raised the amount a borrower must put down toward a home.

As unemployment soars to 22 million Americans as of Thursday, and with no mortgage relief from the federal government in sight, many lenders are expecting late payments and defaults the longer the crisis continues.

With stricter lending requirements, many people will probably remain in their apartments or homes until they can qualify to move to another or more permanent place.

“Residential lending has gotten much, much tighter on the owners' side, that means the demand for apartments is going to be stronger than it was before,” USC Lusk Center for Real Estate Chair Richard Green said during Bisnow’s virtual town hall webinar Thursday. 

More than 400 people registered for the 40-minute event, during which Green discussed the current struggles of various sectors of the commercial real estate industry.

Green said for now, he expects less density in both cities and the design of reopened sites.

New York is currently the epicenter of the coronavirus cases in the U.S., with more than 123,000 confirmed positive cases and 11,500 deaths. Green said the city's density and subway system could have contributed to the spread and high rise of coronavirus cases.

"I still expect five to six years from now, New York will be New York, because it has overcome lots of bad stuff in its history, going back to cholera in the 19th century," Green said. "The resiliency of New York is quite remarkable, which is true of London and Tokyo and other mega-cities around the globe." 

Green added that cities such as Dallas, which have less density and more space, may fare better than urban dense cities after the pandemic. Now, several states or local municipalities may continue mandating some form of social distancing guidelines.

"In the short-term, I think [the coronavirus is] going to have a negative impact on densification," he said. "I think people are going to want to spread out."

As for CRE-adjacent sectors, hospitality has been the hardest hit. The leisure and business travel sector has nearly completely stopped, and business conferences have stopped entirely. 

Hotel RevPAR is down 85%, meaning the average hotel in the U.S. is collecting about $16 a night in revenue, Green said. Add in the fact that most full-service hotels have shut down because the cost of operating is too high, and you have only limited-service hotels still operating, but at low occupancy rates.

“Obviously, one cannot make the business run under those circumstances," Green said. "Basically, anyone who owns a hotel right now is losing money." 

Green said he doesn't expect the hospitality industry to rebound until a vaccine or an effective treatment is created.

The retail industry is also struggling.

Many restaurants with dining rooms had to either completely shut down as part of a local or state mandate to prevent the spread of the virus, or limit their offering to just takeout and delivery. Revenue streams have plummeted as a result. 

Green said that many retail landlords are working with their tenants on a case-by-case basis. Those who can pay the rent, such as grocery and drugstore operators, will continue to pay. Landlords may work with some who cannot.

"They understand that if their tenants are evicted, it doesn't do them any good right now, because they are not going to be able to replace them," Green said.  

In the office market, required social distancing will likely force certain jobs to continue having their employees work from home, which could result in a lower demand for office space.  Green said jobs that do require a physical presence could lead to companies taking more space, in order to adhere to new social distancing guidelines. 

Green said the big issue for tenants and landlords is what happens when the forbearance period is over.

"Nobody thinks [retailers] will be able to pay their past rent right away," he said. "But do you ask for a term extension or do you have the forbearance paid over a one-year period?"