The Effects of Coronavirus on Commercial Real Estate in West Virginia

By Matthew Kingery

The coronavirus pandemic has impacted the commercial real estate (CRE) market and the national economy like nothing else in recent memory. The global financial crisis of the last decade, for instance, did not have as significant an impact on the national CRE market. West Virginia is generally insulated from the extreme downturns in CRE that many metropolitan areas experience. As has generally been the case in West Virginia, CRE activity remains flat in the southern part of the state, but transaction activity in North Central West Virginia and the Eastern Panhandle remains relatively robust. Despite COVID-19 and the manner in which it has affected various sectors of the CRE market, opportunities for investment in West Virginia CRE remain for investors who do their due diligence.

The CRE industry as a whole was in a strong position prior to the pandemic. Capital availability was expected to increase in 2020 and U.S. CRE markets continued to maintain global attractiveness. Although the CRE market usually lags the broader economy by several months in terms of experiencing the effects of a downturn, many recent reports have shown that the COVID-19 pandemic began impacting CRE much sooner. The pandemic caused financial markets to decline sharply, and the CRE industry was immediately affected.

CRE encompasses the industrial, office, retail and multifamily markets, and each of these sectors have experienced the effects of COVID-19 differently. Each property type faces unique challenges. While CRE has been in a COVID-19 related slump, the industrial sector has been a bright spot. Tenants in office and retail spaces, however, put pressure on property owners’ short-term liquidity due to frequent and significant rent relief requests. Developers have been impacted by a shortage of materials, stay-at-home orders and a lack of personal protective equipment. White it has improved in the last few months, the pace of construction was affected by social distancing and cleansing requirements.

Multifamily Market

The multifamily market, including apartments, townhomes, duplexes and condominiums, continues to face the challenge of increased exposure for residents and staff, as well as the risk of non-payment of rental obligations. MarketWatch reported in April that more than half of low-income renters lost their jobs because of the shutdowns. A National Multifamily Housing Council poll found that 31% of renters had not paid their rent in the first week of April. The Center on Budget and Policy Priorities reported in a November article that the unemployment rate remains very high, and millions report they are not caught up on rent payments. On the other hand, several West Virginia multifamily property managers have recently reported that they have not experienced a significant increase in the number of rent delinquencies. For example, the largest multi-family complex in the Kanawha Valley was experiencing record occupancy numbers in August, and the owner had seen no delinquencies.

Some steps toward addressing housing insecurity were taken in the CARES Act, but many of those benefits have expired. Unemployment subsidies, for instance, delayed the impact of unemployment on renters’ ability to pay. Since unemployment compensation benefits and eviction moratoriums have ended, defaults have increased and are likely to continue, especially in low income housing, unless Congress is able to negotiate a new relief plan. Unfortunately, the likelihood of a relief plan in the near term is low because negotiations continue to remain stalled.

Retail Sector

COVID-19 has adversely affected the entire retail sector. Major retailers have filed for bankruptcy protections and shuttered stores. The surviving retailers and brand stores face a multitude of short- and long-term challenges. Furloughs, supply chain challenges, consumer demand, health and safety and cash flow challenges abound. Retailers are shifting their strategies due to the impact of COVID-19 and are being forced to adapt to a new set of consumer behaviors. Consumers’ lives changed, and their spending behavior followed. For instance, many consumers pre-pandemic had turned to digital shopping. The pandemic accelerated the shift from foot traffic to e-traffic. Many Americans are even turning to e-commerce for groceries and other essentials.

Office Space

With respect to the office, COVID-19 has changed the way many of us work. The shift to working from home has led many to ask if businesses need office space. The pandemic has revealed that for many office personnel, remote work is feasible and often even preferable to the daily commute. A third of the work force is now comprised of millennials who value flexibility in when and how they work. Employees are also able to match some of the same technologies at home that were previously only found in the workspace. So long as workers’ productivity from home can match their productivity in the office, many businesses may look to downsize their office utilization to save on overhead costs.

Hospitality Industry

As could be expected, hospitality has been among the hardest hit sectors. During the spring, many hospitality businesses were prohibited from operating. Lengthy stay-at-home orders, an unwillingness to travel and changes in company travel policies all adversely affected and continue to affect the hospitality sector. State and federal imposed travel and dining restrictions drove a steep decline in sales for most of the restaurants and hotels. The National Restaurant Association reported more than $120 billion of lost revenue in the restaurant industry during the first three months of the pandemic. The American Hotel and Lodging Association found that many restaurants and hotels laid off or furloughed as much as 70% of their employees. A study by McKinsey and Company found that in early May, occupancy was less than 15% for luxury hotels and approximately 40% for economy hotels. They predicted that economy hotels would have the fastest return to pre-pandemic levels because they are better able to tap segments of demand that remain relatively healthy despite travel restrictions, such as extended stay guests and long-haul trucking. They also found that economy hotels, based on operating economics, can stay open at lower occupancy rates than upscale chains.

Looking Forward

Despite improvement in CRE fundamentals, significant challenges for development projects and the CRE markets as a whole are likely to remain for more than a year, according to a COVID-19 impact report released by the NAIOP Commercial Real Estate Development Association. It goes without saying that a great deal of uncertainty associated with COVID-19 remains, and that we are likely to see long-term changes in the structure of the CRE business. COVID-19 has affected the way public space is utilized and has resulted in a new normal. It is difficult to predict what the full impact will be on CRE, but there are certainly some changes we can anticipate.

Pressures on rents persist as they are negotiated and adjusted for commercial tenants who have experienced shortfalls due to mandated work stoppages. Although retail spaces are re-opening, expect them to experience decreased traffic for months. Hospitality will continue to see the effects of COVID-19 until Americans are permitted, and feel safe, to travel. Remote work may be here to stay, decreasing the need for office space. The use of virtual property tours will increase. Borrowers’ hesitancy to attend in-person closings will likely remain.

The pace at which the CRE markets recover will depend on a variety of factors, from the development and distribution of a vaccine to the availability of further economic stimulus. West Virginia property owners, developers and investors face significant challenges in assessing the impact of COVID on West Virginia CRE and will be watching these developments closely. Despite the challenges produced by COVID-19, West Virginia CRE will continue to recover, and owners, developers and investors will continue to find ways to effectively leverage CRE opportunities in the near and long term.

About the Author

Matthew Kingery, of counsel for Lewis Glasser PLLC, devotes his practice to commercial transactions, commercial development and real property matters with an emphasis on title, acquisitions, sales and financing issues. His commercial transactions experience includes representation of national, regional and community lenders on commercial loans secured by both real property and other assets, and he has represented multifamily, commercial, mixed-use and mineral projects of all sizes. Kingery holds a degree in the psychology of business and industry from Marshall University and a Juris Doctor from the West Virginia University College of Law. He has been recognized for his work in the legal industry and community and has received numerous awards, including being named a Young Gun by West Virginia Executive.