According to recent data released by Real Capital Analytics, commercial sales volume in the U.S. dropped a staggering 79% year-over-year in May, to just $9.8 billion. The month also marked the lowest deal volume for May since 2010. Commercial property owners were quick to take their assets off the market as prices dropped, and their properties became undervalued. As a result, there aren’t many investment opportunities available on the market, so investors started to look elsewhere.
Companies found new ways to buy into distressed commercial properties over the past couple of months. Big names like Blackstone and Starwood saw the opportunity created and were quick to act, investing in distressed properties via real estate investment trusts, or REITs. Investors bet on the distressed market during March and April when NYC was in complete lockdown and prices were low.
Small-time firms and investors with limited capital to spend also have an opportunity while prices are down. Investing in commercial REITs like SL Green or Vornado is a much more affordable option if you’re on a limited budget, and right now, it’s even more affordable. Pricing for shares is considerably lower than January or February, and it can cost as little as $38 to start investing in NYC commercial real estate.
Read on to see what investment options are available to those interested in the NYC commercial real estate market during this economic crisis.
Investors Bet on the Distressed Market via Public Real Estate Companies
During the critical months of March and April, when NYC was in complete lockdown, lenders were forced to sell at low prices, and investors grabbed the opportunity. Large players like Blackstone, Starwood Capital Group and Oaktree Capital Management placed their bets on the distressed market, much like they did during the financial crisis of 2008. They invested in commercial mortgage-backed securities and public REITs when prices were at their lowest.
Blackstone and Starwood each bought shares in hotel chain Extended Stay America, which is agreeably a smart move, considering that extended-stay hotels are doing much better than other hospitality options. Some predict that these hotels might become temporary housing for those forced to move out of their own homes.
According to the Wall Street Journal, Blackstone acquired a 4.9% stake in the hotel chain at roughly $6.50 per share, while Starwood bought an 8.5% stake for about $9 per share. By comparison, shares for Extended Stay America traded at a little under $20 per share at the start of the year.
Blackstone and Starwood aren’t the only ones betting on public real estate companies during this crisis. SL Green Realty sold $900 million worth of real estate stakes and debt this spring and then used it to buy its undervalued shares. TPG RE Finance Trust reportedly sold $572 million in real estate collateralized debt obligations (CDOs) to Oaktree Capital Management. The Federal Reserve purchased roughly $9 billion worth of CMBS so far, which helped alleviate some of the pressure on owners and unfroze the market for investors.
New York-based Somera Road purchased roughly $60 million worth of commercial real estate debt this spring, 40% of which consisted of commercial mortgage-backed securities (CMBS). The company has a proven track record of finding distressed properties via CMBS trusts, and it has perfected a strategy of handling these types of deals.
Experts Advise Cautious Optimism When It Comes to CRE Investments
Most of these investments in commercial real estate stocks and bonds occurred in March and April, when prices were at their lowest. Lenders were under heavy pressure and forced to sell, and investors wasted no time grabbing the opportunity. Now that the market is gradually reopening, these investments are starting to show returns, and some industry experts are worried CMBS prices are rising too high.
The pandemic’s economic consequences will impact the commercial real estate industry long-term, and experts in the field expect to see numerous defaults in the coming months. The uncertainty concerning the pandemic’s evolution means investors should still be cautious, especially as healthcare experts worry about a second wave. The reality is that the effects of the lockdown on the commercial real estate market will start to show gradually over the coming months, and even years.
Investing in commercial real estate bonds is a good option for corporations, at least for the time being, but what about smaller investors who don’t have billions of dollars to throw around? The answer, once again, lies in commercial REITs.
Investing in Commercial REITs Is a Low-Cost Way of Owning Real Estate in NYC
For small-time investors or individuals interested in investing in NYC’s commercial real estate market, investing in public REITs is an alternative to buying property in the city. Shares in commercial REITs like SL Green or Vornado are much more affordable than they were a few months ago, so they’re a good option if you have limited capital. These companies are among the largest commercial landlords in the city. They operate an impressive portfolio of Class A office buildings, including the Lipstick Building, 1 Madison Avenue, the Graybar Building, One Penn Plaza, or 888 Seventh Avenue. They carefully select their tenants, so the risk of tenant defaults in their buildings is low.
Metro Manhattan Principal Broker Alan Rosinsky shares his thoughts on why commercial REITs are a good investment strategy:
Owning shares in REITs like Vornado or SL Green is an excellent way to invest in commercial real estate when there aren’t many properties available. It’s also a much more affordable investment for those with limited capital, as it costs as little as $38 to buy shares in one of these REITs. The benefits include liquidity, good dividend, and potential appreciation over time. If you’re a young, first-time investor and buy a few shares every so often, you can expect a handsome return upon retirement.
There are disadvantages, too, like the fact that you have no say in how the REIT conducts its business. What’s more, the stock market is volatile, and there is no guarantee that your shares will appreciate. The good part is that if you decide to liquidate your position, you can sell your shares quickly and easily, and you’re out of the game. Moreover, if you choose a top-tier, reputable REIT, you’ll minimize your risk. Companies like Vornado or SL Green could decline 90% without dissolving or going bankrupt, although that’s highly unlikely. There will always be demand for the Class A trophy buildings in their portfolio.
Don’t Wait Too Long to Invest in REITs, As Shares Are Already Getting Pricier
Purchasing shares in REITs might be a safe way to invest in the commercial real estate industry during an economic cycle that’s defined by uncertainty. For those who aren’t ready to take the leap and buy commercial buildings in Manhattan, directing that money in reliable and trustworthy REITs instead might be the perfect alternative.
Pricing for shares of REITs in Manhattan is significantly lower than it was a couple of months ago, so this might be the perfect time to start investing. Share prices are beginning to increase as NYC moves through the first stages of reopening.
SL Green closed at a low of $36.83 on May 22nd and is now at a little over $50. Pre-pandemic, SL Green stock traded at over $94 per share, so the difference is still significant. Vornado shares traded at over $68 at the start of 2020, and are now at $38. This may be a favorable time to invest in commercial REITs, as prices could potentially trend upwards as New York City moves onto the next reopening phase.
Even with prices on the rise, investors should still be cautious. The evolution of the pandemic is unpredictable, and there’s no way to know for sure how economic conditions in New York City will evolve. If you do decide to invest in commercial REITs, you will need to keep an eye on how the sector is faring and how your shares are doing, so you can make sure your investment is still worth it.