US commercial property prices on downtrend

Indexes for office, retail and lodging properties all slipped year-over-year in July, data from industry tracker Real Capital Analytics Inc show. Transaction volume plummeted to US$14bil across all sectors, down 69% from July 2019.(File pic - New York skyline - Reuters)

US commercial real estate prices are falling as the economic toll of the Covid-19 pandemic worsens – and the decline is just getting started.

Indexes for office, retail and lodging properties all slipped year-over-year in July, data from industry tracker Real Capital Analytics Inc show. Transaction volume plummeted to US$14bil across all sectors, down 69% from July 2019.

“The worst is yet to come, ” Real Capital senior vice-president Jim Costello said in a telephone interview.

“We’re not seeing the fallout yet of owners selling properties and taking a loss.”

Commercial real estate deals have been in a deep freeze as lenders give borrowers slack to defer payments and landlords are reluctant to drop asking prices. That may change in the next few months as debts mount and the outlook dims for retail, hotel, office and even apartment properties that already suffered from oversupply before the pandemic hammered the US economy.

“I wouldn’t be surprised if we start to see some of it start to break in September or October, ” Costello said.

Hotel prices dropped 4.4% in the year through July, while retail declined 2.8% and offices fell 0.9%, according to Real Capital.

Apartment building prices climbed 6.9%, and industrial values rose 8.3%, leading to a 1.5% gain for all property types in the period.

On a monthly basis, industrial prices jumped 0.9% from June, while apartments gained 0.2% and other sectors fell.

The last time office prices slipped year-over-year before the pandemic was January 2011. In central business districts of cities such as New York, San Francisco and Boston, prices started recovering from the Great Recession in the fourth quarter of 2010.

Multifamily prices are starting to diverge as suburban garden apartments lure residents from urban-core buildings that faced pricing pressure even before Covid-19.

Family-forming millennials will drive the shift away from expensive, densely populated cities long after the pandemic’s impact fades, so property values in the suburbs are likely to rebound faster, Costello said.

“The last downturn, suburbs were the laggard, ” he said. “This one will be different.”

The need for physical distancing and the ability to work remotely may be a factor why real estate in suburbs are gaining popularity.

Work-from-home theme

In finance industry on both sides of the Atlantic, over the last few months, thousands of bankers, brokers and wealth managers have turned kitchen tables into corner offices, selected the best backdrops for video conferences and constructed their own trading rigs.

The precise nature of their future working environment remains an open question but some employers have started to offer glimpses of what to expect.

Here’s a variety of approaches that companies across the finance industry have announced.

Investment bank Goldman Sachs Group Inc has sent invitations to hundreds of senior staff to return to its London offices in recent weeks. The firm is offering staff incentives such as free food, protective gear and access to on-site nursery, although the return to the office is voluntary, Financial News reported Aug. 27.

“We continue to take a people first approach and stay consistent with UK government guidelines, ” a spokesman said in a statement.

Bank of New York Mellon Corp has told the majority of its employees to continue working remotely for the rest of the year, postponing previous plans to have some staff return in September. About 96% of the bank’s roughly 48,000 employees have been working remotely since March. They’ll continue to do so until at least January, a spokeswoman confirmed Aug 26.

JPMorgan Chase & Co said it would allow its staff to cycle between days at the office and at home.

Daniel Pinto, chief executive officer of the corporate and investment bank, said in a June interview he envisioned JPMorgan’s staff working in rotations with about a third logged on remotely at any time – although it’s unlikely anyone will always work remotely.

After bringing about 5% of employees back to its New York headquarters earlier this summer, Citigroup Inc delayed similar plans for workers in US states that have seen a resurgence in cases, including Texas and Florida. More recently, the firm told its employees in North America that top executives would view data on local transmission rates after the Labor Day holiday in September to determine plans for reopening offices.

British lender Barclays Plc has about 69,000 employees working remotely until at least the end of September. The bank plans to inform them individually when to come back, with return dates likely to span several months from October.

“It’s important to get people back together in physical concentrations, ” CEO Jes Staley said in a Bloomberg Television interview in July, although he emphasised health and safety concerns would be paramount and didn’t set a timetable.

Second-biggest US lender Bank of America Corp will start bringing employees back to offices in phases after the Labour Day holiday Sept 7, providing staff with 30 days’ notice. The process will probably be limited at first, and consistent with the bank’s cautious approach.

The moves will vary by role, department and location. Business travel is banned through Sept 7 unless approved by a member of the top management team, while in-person events are also restricted internally and externally. — Bloomberg

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