Quo vadis office market?
Due to the corona-related recession and the trend towards the home office, many experts expect difficult times for the commercial property market. Christian Kunz from TSO Capital, which specialises in investments in commercial properties, takes a close look at the US market.
Six months ago, the world of investors in the US office real estate market was still in order. Office space was in short supply, vacancy rates were heading towards zero and office rents in the major cities were rising significantly. But that is all over since the outbreak of the corona pandemic. As the experts from Legg Mason analyze, rental activity for office real estate in the USA had already fallen by around thirty percent in the first quarter of 2020 compared with the same quarter of the previous year. In addition, DZ Bank believes that office demand as a whole is threatened in the longer term by demographic trends, flexible working models and the increased use of the home office.
But what does the current crisis mean for investors who have invested in US office real estate in recent years? "First of all, investors should not panic," says Christian Kunz of TSO, a provider of financial investment products that operates in the Southeastern US and specializes in commercial real estate. "We are finding, for example, that only about four to five percent of our commercial tenants in the Corona crisis need to talk about rent."
However, the effects are also quite different in individual cases. Hotels, restaurants and other leisure properties have been hit harder by the crisis than office properties. TSO has, for example, succeeded in selling several office buildings lucratively since the end of 2019, most recently in February of this year, and thus making special distributions to investors. "However, the right investment strategy is also crucial for this," explains Kunz. "Of the 1,200 properties we examine each year, we only select between six and ten for our portfolio".
Good situation is crucial, especially in times of crisis
Important selection criteria are the location, the future potential of the market, good tenants and sufficient diversification in the portfolio. The expert is convinced that properties in good locations in particular will make up for any price declines in the coming months. "Moreover, in the current crisis, we have taken early measures to secure cash flow - i.e. operating income - at an early stage," Kunz continues. "In addition, we have talked to lenders at property level in order to reduce costs, and have made adjustments to 85 of our 2,200 tenants, i.e. agreed deferrals, which therefore do not adversely affect returns".
"Such a partnership approach helps to keep important anchor tenants in the properties in the long term," Kunz continues. As a result, TSO has been able to master the crisis well so far. Although the expert is already assuming that Corona will bring about some changes on the US office market. "But it will not be the case that this investment segment will lose in general. In future, for example, companies will have to plan in such a way that there is sufficient distance between employees' workplaces. The fact that companies need more space per employee for this reason offsets part of the trend towards more home office space."
Self storage centres as a promising growth market
But TSO has also long since started to look for opportunities. "Although there are not many bargains because prices have not fallen as much, there are already opportunities in some areas in view of the favourable financing conditions," says Kunz. He sees the southeastern USA, where TSO operates, at an advantage. "This region is an important economic hub. We have the largest passenger airport in the world in Atlanta, there are many supplier companies here and we have an enormous population growth," explains Kunz. "And thus good conditions for the demand for office real estate to stabilize again soon."
He sees an interesting subsegment in the commercial sector in self-storage centres. "Even before the crisis, demand exceeded supply. However, Corona - as after other crises - can still give a boost, because then many people come to the southeast in search of a job and therefore need storage space when they move. Normally, he explains, the new letting of such storage space averages two to three percent per month, but currently the value is three to four percent.
"Of course, we don't know how this area will develop. But so far our Self Storage Centers are very well utilized. We are developing self storage centers together with CubeSmart, one of the largest providers in the USA, and are currently selling to Cube-Smart after a holding period of 18 to 25 months," summarizes Kunz. But here, too, he says, it is important to pay attention to quality. For example, such self-storage centers must be located in easily accessible central locations, have a high security standard or be video-monitored and air-conditioned. "Especially in the area of high-quality self-storage centers, we assume that we will continue to see strong growth," says Kunz. So this crisis in the commercial property sector also seems to bring opportunities.