We’ve experienced a full year of Covid-19’s impact on the commercial real estate industry… whew, what a ride! For those of you who have followed our newsletter over the last year, we’ve looked at both the immediate impacts of the pandemic and the picture as we approached the end of 2020. In both cases we analyzed the difference from what was budgeted, knowing our 2020 budgets could not have anticipated a pandemic. Now that we have an entire year of pandemic-impacted data that extends into 2021, we’re shifting our approach to look at actuals over the last year.
The graph shows year-over-year (YoY) change; each month’s percentage shows the change from the corresponding month in the previous year. All these are actual figures, which cumulatively paint a picture of the true impact of the pandemic on a sizeable portfolio of commercial real estate properties in our region.
Interpreting this data is speculative, of course, but I think there are three clear takeaways.
Riding the roller-coaster
First, the red line of operating expenses shows how landlords reacted to four distinct phases of the pandemic. To me, the actions of landlords show remarkable nimbleness and responsiveness to an unexpected black-swan event, showing superb leadership by our clients.
Specific to the graph, the initial unexpected shock of the pandemic created an immediate reduction in expenses in April 2020. Next, as I noted in a previous newsletter, by summer 2020 landlords stopped deferring property maintenance, and their Covid-19 mitigation strategies increased janitorial, security and other operational costs. This meant monthly operating expenses actually began exceeding budget, so the YoY totals balanced back out by July.
But then the nationwide surge in cases due to premature summer enthusiasm created renewed hesitancy and concern, resulting in spending going back down in August and September. Optimism returned going into winter, only to stumble in January 2021 as a halting vaccine rollout, political upheaval and social unrest brought further uncertainty.
Over the year, it was pretty much a roller-coaster of fiscal emotion.
Relative revenue stability
The second significant outcome can be seen in the black line of total revenue for the last six months (October 2020 through March 2021; Q4 2020 and Q1 2021). The graph shows a 2% revenue drop, YoY, for those months. This actually represents relative stability in total revenue, compared to the first two quarters of the pandemic. While our managed portfolio did not recover as robustly as national indicators such as GDP (up 4% in Q4 2020, 6% in Q1 2021, annualized) and the boom-times stock market, commercial real estate didn’t reflect the doom-and-gloom of some predictions, either—particularly for retail assets, which make up the majority of the properties here.
NOI and November
The third thing: You may notice the gray NOI line diving down off the bottom of the page for November… As landlords well know, November is the month to pay either the first installment or the full annual amount for Oregon property taxes. This commonly results in reduced NOI in November—and so the YoY change above appears more significant than it is. The net difference in NOI from 2019 to 2020 is actually only around 10% less than the adjacent months of October and December.
The ride’s not over
It’s an inescapable fact: The future remains unsettlingly uncertain. As shown by the precipitous swing in responses from landlords described above, the twists and turns of our pandemic recovery lead to commensurate adjustments in our industry. Buoyed by government stimulus and improved consumer optimism, retail is poised for a great 2021, and the industrial backbone of e-commerce promises to remain red-hot. However, continuing uncertainties around the vaccine rollout and the durability of being “fully vaccinated” will undoubtedly weigh on retail and the eventual return to the office.
It’s important to mention that the data from the 1,300-odd tenants in our managed portfolio represents a broad range of experiences over the last year. Numerous businesses have struggled tremendously or failed altogether. Many have adapted to the realities of the pandemic and used extraordinary hard work, fortitude and grit to survive. Yet others have experienced unprecedented growth. From March 1, 2020, to March 1, 2021, NAI Elliott worked on 260 lease amendments; each one represented the story of a business—local, national or anywhere in between—and reflected the thoughtful accommodations of a landlord.
A promising rent-relief program
A final note about the future. We’ve been actively coordinating a program on behalf of our landlords and tenants, the Business Oregon Commercial Rent Relief Program. While no rent payments from that program are included in this analysis, we anticipate more than $1 million in revenue from the program, money that will benefit both landlords and tenants. Look for our June newsletter, where we’ll share the specifics of this program.
While we all hope each successive phase of this pandemic will finally reveal some clarity about its conclusion, reviewing a year’s worth of data confirms a murky future. Our best strategy as we move through (and then past) this is to remain responsive, nimble and adaptable—and that includes landlords, tenants and commercial real estate professionals alike.