Impacts on Capital Markets

The impacts of COVID-19 on the U.S capital markets became readily apparent in April data. Transaction activity remains largely frozen due to a significant spread between buyer and seller expectations, a lack of price discovery, disruption in the debt markets and logistical challenges to due diligence efforts. In a recently published report, Real Capital Analytics noted that U.S. deal volume plunged in April to $11 billion, down 71% year-over-year and the lowest volume recorded since April 2010.

According to Real Capital Analytics, the number of active buyers in the market collapsed by 77% between mid-2019 and April 2020, a faster rate of decline than witnessed during the Global Financial Crisis of 2008. The number of collapsed deals as a percentage of closed transactions spiked to 3% in April, up from 0.4% one year earlier.

All sectors have been impacted, but none more severely than hotel and retail where year-over-year transaction volume fell by 98% and 84% respectively. Just eight hotels were sold in the U.S. in April, the lowest monthly level of activity ever recorded by Real Capital Analytics. While economy and extended-stay hotels are faring better than full-service operators in terms of occupancy, the overall sector faces a long road to recovery. In the battered retail sector, malls have been particularly hard hit. With bankruptcies and announcements of permanent store closures beginning to pile up for major brands, enclosed malls face stronger headwinds than open-air centers, particularly if co-tenancy clauses trigger an additional cascade of vacancies.

Office performance thus far remains mixed, varying by individual asset and region. Markets with significant exposure to the travel and energy industries and large cities with severe outbreaks of COVID-19 are the most challenged thus far in terms of rent collections. Industrial performance is also mixed. While some industrial users tied to e-commerce have experienced a surge in activity, other businesses have seen a sharp decline in demand or have faced significant operational challenges. In an unexpected bright spot, multifamily rent collections were surprisingly strong – above 80% – in April and May as expanded unemployment benefits kicked in for many renters. Tenants thus far appear to be prioritizing rent payments over other expenses.

While some opportunistic buyers are already looking for acquisition and development opportunities in select high-growth markets, most owners are currently focused on managing their portfolios and preserving liquidity. With markets across the U.S. in various stages of reopening their economies, some buyers may begin to come off the sidelines, but until prices adjust to reflect the increased risk in today’s market, deal flow will remain severely constrained.