Real estate finds itself playing the COVID-19 waiting game

real estate
(Don Kadair)

“It isn’t going to be pretty. Maybe this thing bottoms out in the second quarter and we can start to recover by third quarter. If it goes much longer than that, it’s going to be real ugly.”

—MIKE WAMPOLD, developer, on the short-term health of the real estate sector

For some sectors of the Baton Rouge real estate market, the coronavirus crisis will be bad. For others, it promises to be catastrophic.

While the housing and multifamily sectors will suffer, they didn’t immediately feel the pain. Even as the stock market was tanking and governments around the country were imposing ever-stricter restrictions on everyday business activity, zero percent interest rates had some commercial investors and homebuyers still looking to do deals.

“Houses are still selling because they’re giving money away,” says developer John Engquist. “But you put enough people out of work and I can guarantee you it’s going to impact real estate.”

The commercial real estate sector, on the other hand, was hit hard and fast. Most retail strip centers have changed up their tenant mix in recent years to include more restaurants and health club facilities than traditional boutiques and apparel retailers.

As a result, when Gov. John Bel Edwards on March 16 ordered all bars, restaurant dining rooms and gyms to close for at least 30 days (an order extended until the end of April), landlords started hearing from their tenants almost immediately—and banks started hearing from landlords.

“If the landlords can survive, it’s better to work with the tenants,” says Matthew Laborde at Elifin Realty. “But the landlords don’t have that option unless the lender isn’t similarly forgiving on the loan payments, so it all starts with the lenders.”

Other sectors of the real estate market aren’t reeling just yet but the prognosis isn’t good. Even before the crisis, rental rates were flat in the market’s multifamily sector and vacancies were up from an already troubling 9.5% in 2019 to more than 10% this year.

The local office market was also soft. Now that companies will be retracting and laying off, there won’t be much demand for space in pricey downtown office towers or in the many new garden office parks that have recently added to available inventory.

Industrial properties may fare even worse: The oil price war between Russia and Saudi Arabia that has been a subplot of the outbreak has sent oil prices to levels not seen since the 1980s and all but assured industrial expansion in south Louisiana’s petrochemical service sector will be put on hold for two to three years at best.

What this all looks like six weeks or six months out is hard to predict, though most agree the longer the small retail tenants that sustain commercial real estate developments are forced to stay closed, the worse the damage will be and the longer the recovery.

“It isn’t going to be pretty,” predicts developer Mike Wampold. “Maybe this thing bottoms out in the second quarter and we can start to recover by third quarter. If it goes much longer than that, it’s going to be real ugly.”