The covid-19 pandemic certainly changed the way things are done and the way businesses are conducted. In such an uncertain scenario, most real estate investors are curious to know what types of commercial real estate properties are a safe bet, and some types that can be risky. Like any other industry, it is hard to put fast rules on what might or might not be dangerous.
However, one can make informed decisions based on the opinions of real estate experts. While some commercial real estate areas have always been inherently risky, some others have become risky post-covid-19 pandemic.
For example, hotel real estate is a real estate sector that has always been inherently risky even before the pandemic, and it continues to be so during and post-pandemic. Hotel real estate is a cyclical business to begin with, which is highly dependent on consumers.
The pandemic changed the hotel industry sector entirely as most of the consumers opted out from dining-in and started ordering from home.
On the other hand, cloud kitchens grew in popularity due to fast delivery and low maintenance and rental costs. Besides, it may be noted that during the pandemic, travel demand has reduced, and many hotel operators are likely to be unprofitable in the near months to come.
However, it must be noted that, like most areas of the stock market – it’s not a good thing to over generalize on what might or might not be a risky venture.
In simple words, there is a broad spectrum of risks when it comes to investing in commercial real estate, and it has increased even more so during the pandemic. Bearing that in mind – in this blog, we will walk you through some of the most important things to look for when you are evaluating commercial real estate stocks.
Please note that this is not an exhaustive list, and these are only some of the critical factors you must consider before assessing your risk in commercial real estate Investments.
Key Factors to Remember While Investing in CRE
#1 – Rent Collection
The rent collection factor has become one of the most important things to look at while evaluating risk, especially in the covid-19 environment. While the government has waived many tenants from paying the rent on time, this is becoming most important.
It is interesting to note that many real estate investment trusts have provided the latest updates regarding how much rent is collected instead of how much they have built their tenants for. Most of the real estate investment trusts have collected only 70% of the billed rent in recent months.
When you look at collecting different properties, you can get a fair picture of what kind of stuff might be a safe investment for you and what others could be risky.
#2 – Commercial Real Estate subsectors
The commercial real estate sub-sectors are another factor you must be looking at while investing in commercial real estate stocks. Certain types of real estate are simply more sensitive to economic recessions.
Like in the above example, the hotel industry is a very evident commercial real estate sector, which might be a risky investment in the present scenario. Similarly, investing in retail real estate is also risky as most consumers are working from home and are not going out shopping.
On the other hand, investing in the E-Commerce ecosystem is a much safer option. For example, the warehousing and distribution facilities are in high demand during the pandemic. Thus, investing in REITs that deal with warehousing and distribution facilities could be a safe bet in the covid-19 scenario.
#3 – Dividend Pay-Outs
As an investor, you must be interested in knowing the dividend pay-out of a particular REIT you wish to invest. In the recent covid-19 scenario, most REITs were forced to suspend or reduce the dividend payout.
You can get a fair understanding of REITs’ dividend pay-out by comparing its dividend to its funds from operations, also known as the pay-out ratio. Based on this pay-out ratio – you can predict the amount of dividend payout you can expect in the future from a particular REIT that you are looking at.
Additionally, you can look at the previous dividend-pay-out statements of the REIT to understand the average dividends you can expect from investing in a particular REIT.
#4 – The Covid-19 Impact
The coronavirus pandemic had been a significant issue for most commercial real estate owners, but one should note that it has affected some of them more than others.
From the risk standpoint, the covid-19 has created a disproportionate amount of uncertainty and ambiguity in a lot of REITs. For instance, most hotel operators have suffered huge losses; on the other hand, the co-living spaces for warehousing and distribution facilities have seen good profits.
Thus, it is most important to consider the individual impact that covid-19 has had on a particular it before investing in one. You can do your research or get in touch with real estate experts to understand the impact of covid-19 on different REITs types.
Initially, you can directly ask the REIT you are trying to invest in on the coronavirus’s effect and how it has affected their operations. It is advised to stay away from risky commercial real estate stocks like hotels or travel companies.
#5 – Adaptability Factor
The adaptability factor of commercial real estate stock to adapt itself to the covid-19 situation is another factor you must consider while evaluating your risks.
Some REITs were quick to realize that hotel businesses would drop down and were quick to switch to different types of commercial real estate business like warehousing and distribution facilities co-living and co-working spaces.
This was especially true for tier 2 cities where most of the millennial population decided to move out of the stand-alone buildings or multi-family properties and more into co-living spaces to get a sense of belonging and community with other added amenities and features.
The reality is that REITs that were quick to adapt to the changing commercial real estate scenario profited and are expected to profit in the future years as well.
#6 – The Credit Rating
The next factor to look at while considering your risk is the credit rating of the REIT you are looking at. In a general scenario, you should understand the REIT’s credit rating in its recent investor presentation or in the annual report.
While it must be noted that credit rating isn’t the sole risk indicator, it can still give you a lot of insights and highlight which REIT might have had a solid balance sheet and which ones did not.
In a nutshell, Commercial real estate stocks that were already risky or volatile pre-pandemic have become even riskier now. Thus, it is more important now than ever to invest in commercial real estate stocks with utmost risk analysis and a deep understanding of different property types.