This is the second part of a series on COVID-19. Read Part 1 here.
As is the case with all economic disruptions, the COVID-19 pandemic will likely vary in its impact on different types of commercial real estate. At times like these, it's important to remember that the impact of disruptions related to Delaware Statutory Trust (DST) depends on the impact to the asset that the DST is invested in. These difficult and uncertain economic times serve as a reminder as to why our firm and our broker dealer spend so much time and energy on property-level and sponsor due diligence.
At this point in time, it’s uncertain how long this pandemic will last and thus the extent of damage the economy will sustain. In general, I am confident in the long-term outcome of DST investments our clients have invested in. However, there have been some changes to distributions already, and I wouldn’t be surprised to see more distribution changes in the near future. I won’t attempt to estimate the length of this pandemic, but I do believe the virus will eventually subside or be controlled. At such time, I hope to see DSTs in which distributions were impacted return to their intended levels.
Over the last few weeks, I have been on many conference calls and read numerous emails and papers on commercial real estate to gather information and educate myself. Here are some of my thoughts regarding the impact on various sectors.
Lodging and Gaming. With travel at a standstill, hotels, resorts, and convention centers will suffer greatly in the short term. Even when conditions return to a more normal state, financially-wary consumers may be more cautious with their discretionary spending, which this sector is very reliant upon.
Retail. Closed stores and shuttered restaurant dining rooms reflect how deeply the coronavirus has touched the retail sector. The ripple effect is already extending to landlords who are dealing with requests for rent relief from tenants, while these owners have their own loan servicing obligations to lenders.
Residential. Multi-family housing has been one of the strongest investment sectors for the past several years¹ but is experiencing its own stress as large numbers of unemployed workers try to figure out how to make rent payments. The stimulus package passed by Congress, however, will potentially help keep most renters in place while we await economic recovery. Also, while the epidemic certainly makes it more difficult to attract new tenants, it’s also more likely that tenants will decide to renew leases. I believe the outlook here is fairly good.
Infrastructure, Data Centers, and Industrial. These asset types provide essential services that we all need most at this time, so I believe they’re well-positioned during this crisis. Infrastructure and data centers are vital for our communication needs and large industrial buildings are important in the supply chain in getting products to consumers.
Self Storage. Storage is often considered to be “recession-resistant.” Perhaps it’s also proving to be “pandemic resistant.” I have spoken to a number of storage operators who have shared that, generally, they’re seeing increased demand at their facilities. The disruptions in business, travel, education, and housing are likely driving factors to this increased demand.
Despite the challenges facing the industry and the participants who are part of it, I believe commercial real estate as an overall asset class will adapt, change, and endure. For individuals who have invested in Delaware Statutory Trusts (DSTs), this period only reinforces why it has been so important to work with strong and capable sponsors that have a history of putting investors' interests first. Additionally, I have confidence the in-depth due diligence process we use to evaluate and select DST sponsors for clients reveals these sponsors’ skills and capabilities in preserving the underlying assets.
I wish you all the best in staying healthy and safe. Like many Americans, I have confidence we will come out of this moment in time stronger than ever.
¹ Daniel Littman, “The Shifting Preferences of Commercial Real Estate Investors,” http://www.ngkf.com/home/research/real-insight/the-shifting-preferences-of-commercial-real-estate-investors.aspx, December 2019