The speed of recovery from the coronavirus pandemic will vary across real estate sectors, depending on how well they have fared during the crisis.
"People are focused on a lot of concerns around the sector. It's obviously physically based," The Blackstone Group Inc. COO Jonathan Gray said during Morgan Stanley's Virtual U.S. Financials Conference.
Payments have generally been better than most people expected, and rents have been more resilient, Gray said. Low interest rates should also be a positive for real estate values over time, as will a reduction in new supply as it becomes tougher for developers to access finance and managers use their capital to shore up existing portfolios.
Sectors such as logistics, particularly with regards to last mile, life science office buildings, and apartments, where "people generally pay their rent to maintain the roof over their heads," will continue to do well coming out of the coronavirus crisis, Gray predicts.
The picture is "a bit more mixed" for office space, and in the near term, the sector will have headwinds, he added. Concerns around going into cities, increased talk from companies about remote working, and a rise in unemployment will put pressure on office markets. On the flip side, long-term leases and businesses focusing on the density of their workers will be helpful.
But fundamentally, "companies are more productive together," Gray said. "If we get back to a place where there's a perception of safety, either because the virus sort of burns out over time or we get a vaccine sometime, I do think people will go back into cities and go back into office buildings," he added.
Hotels have taken "the biggest hit," Gray said, anticipating a range of outcomes for those in the hotel business over time as travel begins to pick back up, he added. "A limited service Hampton Inn in a rural area will come back a lot faster than a large urban meetings hotel that depends on national and international travel."
Retail, particularly enclosed malls, are likely to face significant rent, vacancy and capital expenditure issues, Gray predicts, while grocery-anchored retail is better positioned. Senior living has also been "badly hurt" due to the number of COVID-19 fatalities. Once the world moves to a "period of perceived safety," however, he expects real estate managers will return to senior living assets given an aging population.
Capitalization rates could decline in sectors perceived as winners coming out of the crisis, Gray said. "Borrowing costs in the U.S. and Europe are so low. You're now borrowing with a spread at sub 2%. I think that puts on downward pressure."
"On the flip side, if you had an office building in an urban center and the tenant rolls next year, that asset may see a higher cap rate as a result of that because of the risk and the difficulty of providing financing," he added.
The more stabilized an asset is, whether it be real estate, infrastructure, or anything that is viewed as fixed income and safe in nature, could see a re-rating higher, "which is a little bit counterintuitive to what one might have expected, let's say, 60 days ago," Gray said.