Does it make sense to do a real estate deal in the midst of COVID-19?
As business owners and healthcare practices navigate a perfect storm of political, economic, and public health issues stemming from COVID-19, mixed messages continue to stir up uncertainty for the near future. It’s hard to keep track of all that’s happening, and many people are looking for some clarity.
During this pandemic, and in any economic downturn for that matter, CARR’s agents are frequently asked these questions with regards to commercial real estate:
- What are you seeing right now in the market?
- Should I proceed with my office purchase? Relocation? Lease? etc.
- Would it be better to wait until this is all over?
Has your practice made a real estate transaction in the last year?
First, if you are a healthcare practice owner or administrator,
now is not the time to shrink back in fear, especially regarding your office’s
real estate. Exercising prudence and making an informed decision is important.
The opportunities developing in the market should be promising to anyone considering
a real estate transaction for their practice. This means any practice owner
considering a lease, purchase or ground-up project could make one of the best
real estate decisions of their career.
There are several factors in the current climate that a healthcare practice owner should find encouraging with regards to real estate.
What landlords think
While each landlord’s financial position is as varied as the tenants they lease to, landlords are experiencing substantial uncertainty. Many tenants have transitioned their employees to working from home and no longer need as much physical space. This phenomenon, combined with increased overall vacancy, has landlords bracing for increased delinquency and defaults in most markets.
Landlords that lease predominately to healthcare tenants are possibly the most insulated from the effects of COVID-19, since healthcare practices are more stable than other tenants. Patients still need care and treatment, and many practices experience average or above average patent volume post-quarantine.
Most landlords will offer attractive concessions, especially to long-term tenants who are properly represented. Landlords routinely provide a free rent period during construction, as well as an additional free rent period after the tenant opens the space for business.
They might also contribute to construction costs through tenant improvement allowances or even a turnkey space. It requires market knowledge and experience to know how much of these concessions to request. Landlords won’t provide these types of benefits if they don’t believe they have competition from other landlords and spaces, or if the tenant doesn’t know to ask.
The impact of lower construction costs
Residential real estate costs are at an all-time high. More homes are being built, bought, and sold than ever before, driving up demand and pricing.
Commercial development, however, has slowed. The reduced commercial demand has caused the price of labor to drop accordingly. It is unlikely that the commercial construction world will rebound anytime soon to pre-COVID-19 status. General contractors, as well as the majority of commercial sub-contractors, are reporting that their projected pipeline of work is narrowing over the next year or so. The businesses that have been impacted the most will not be moving forward quickly as the dust settles. Many uncertainties still exist with regards to ongoing restrictions and regulations, especially for retailers and large office tenants.
Prior to COVID-19, construction prices prevented a number of healthcare practices from transacting. However, what was recently a barrier to relocating a practice or adding a location has now become an opportunity.
Interest rates are at an all-time low
A key objection to moving forward with any real estate transaction in this current climate is: “What if I buy/lease now and market continues to fall afterwards?”
The truth is that prices bottom out at a different time in each market and knowing that exact moment is nearly impossible. The good news is, history has shown that real estate prices climb over the long term. Deciding not to transact is usually much worse for a practice owner than missing out on the ‘perfect’ opportunity. As a healthcare practice owner, you will likely only do one, two, or maybe three real estate deals in the course of your career. Your next real estate transaction will probably serve you well for the next ten to twenty years.
Take the long play into account and further consider that interest rates are at an all-time low. Now is a great time to act. In the not too distant past, rates were several points higher. For illustration, a 2% rate drop for a 20-year note on $1 million dollars results in nearly $250,000 in interest saved. This, in combination with current market conditions, creates a phenomenal opportunity for most practices.
Recommendations for commercial real estate
Here is CARR’s recommendation for the typical healthcare practice with regards to their commercial real estate. While there are exceptions and assuming steady production volume, we believe these to be true for most practices:
- If you were going to do a deal pre-COVID-19, it still makes sense to consider a deal now. In most markets, you can now achieve terms that are more favorable.
- If you began a deal that was interrupted by COVID-19, you should most likely proceed with that deal if you haven’t done so already.
- If you were not planning on doing a deal but are enticed by current market conditions, research your options as you might uncover a great deal. By hiring the right representation, you could know your most viable options very quickly.
Factoring in the state of business for most landlords, the dip in construction costs, the all-time low on interest rates, and the leverage a healthcare practice inherently holds as blue-chip tenant or buyer; now could very well be the best time in the last 10 years to complete a lease or purchase transaction for your practice.