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COVID Reshapes Office, Retail, Sparks Opportunities for REITs

COVID-19 hit the commercial real estate market hard.  

Central business districts became ghost towns. Major department stores went bankrupt. Restaurants went dark. Hotels and offices sat empty.

A year later, landlords are struggling to collect rents and avert default. Shockwaves are expected to ripple through the economy for years.

Executives at Denver-based Black Creek Group spoke at a recent SHOOKtalks about COVID’s impact on the commercial real estate market. The session was moderated by Steve Stroker, chief executive officer of Black Creek Capital Markets.

“What we saw was an acceleration of trends that were in place before COVID,” said Michael Moran, Black Creek Group’s vice president of retail acquisitions and asset management.

Consumer spending accounts for two-thirds of U.S. domestic spending and among the hardest hit sectors was retailing.

“Retailers have had to evaluate what the store format brings to the table. Some retailers are using their stores as fulfillment centers and return centers,” Moran added.

Consumers spent $787 billion online with U.S. merchants in 2020, 30% more than what was spent in 2019, according to the U.S. Department of Commerce. Meanwhile, retail sales at stores with physical locations were essentially flat last year.

Amazon
AMZN
, which is Black Creek’s largest tenant, added 100 million square feet of space during 2020 to meet the surge in demand. Amazon currently accounts for about 30% of online sales.

As the pandemic pushed shoppers online, many bricks and mortar retailers responded by making major investments in e-commerce, said Brian Lange, senior vice president and portfolio manager at Black Creek.

Black Creek developed a warehouse footprint in Southern California to handle products manufactured in China and shipped to the U.S. The company also has major warehouse operations in Dallas-Fort Worth and in the northern New Jersey-central Pennsylvania area.

The pandemic caused companies to scramble for warehouse space to store and fulfill orders.

Online shopping created demand in another area: space to house merchandise returns. About 30% of the items purchased online are returned. Companies need a dedicated location where they can process and store the merchandise, Lange said.    

All this is good news for privately held Black Creek which operates 70.6 million square feet of multifamily, office, industrial and retail properties in 31 U.S. markets.

About 80% of the company’s commercial space is warehouses. The remainder of Black Creek’s properties focus on convenience-oriented retail anchored by a grocery store, multifamily residences and suburban offices. The properties were acquired and developed by a series of Black Creek real estate investment trusts funded by investors.

REITs are popular since they rely on rents and property sales to produce income. They typically pass about 90% of their income on to investors. 

“The total return comes in a world where interest rates around the world are near zero and there is a tremendous need for income by sovereign wealth funds, pension funds and high net worth individuals,” said Black Creek Chief Executive Officer Raj Dhanda.

Dhanda said Black Creek follows a simple formula: it develops, owns and manages the properties it acquires. “We tend to stay in areas where there is 20, 30, 40 years of data and there is a track record and liquidity,” he said. “The data points us to industrial, multifamily, necessity-based retail and suburban office. We tend to stay in the larger, more liquid property types.”

Dhanda said being an owner-operator gives Black Creek a better perspective on the relative value of the investment.  “The closer you are to your user-tenant, the better off you will be,” he said, noting that owner-operators are “much more highly switched on to tenant needs.”

“Warehouses may not be sexy since it is a rectangular box with high ceilings and truck parking and docks,” he said, noting that the functional nature of a distribution warehouse is a great advantage. The tenant foots most the bill to finish the interior and “we don’t have to do a lot to reposition the property for the next tenant.”

“There’s thousands of people looking for fulfillment centers today,” Dhanda said. “We believe that e-commerce and inventory management are in the early innings and that there are powerful tailwinds.”

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