Strong Balance Sheets Will Protect Asset Values

Strong balance sheets and minimal leverage have become the themes of this downturn. Compared to the Financial Crisis, commercial real estate companies are not overleveraged and prepared to weather the storm. According to Kevin Shields of Griffin Capital, lower leverage profiles will help to stabilize asset values through the recovery.

“Opportunity funds that were levering themselves up before the Great Financial Crisis were 80% or 85% levered. It doesn’t take a big market move to wipe out that equity. Here, I don’t think we have that,” Shields, CEO of Griffin, tells GlobeSt.com. “When we wake up and this is all behind us, maybe markets are off 5%. I don’t see a big move in overall valuation, even though it is tough to see today because we aren’t seeing a lot of velocity in the marketplace.”

Certainly for Griffin Capital, the leverage profile has changed significantly since the last recession. “In 2008 and 2009, our leverage profile as a general proposition was much higher,” says Shields. “We were fairly consistently levering up to 75%. We have a different format of vehicles today, and most of our funds or registered and public. Across our platform, we are less than 50% levered and the REITs are about 40% levered. Even our multifamily portfolio is 45% levered.”

In addition to strengthening asset values, less leverage also means that Griffin can be more flexible with tenants. “We can be very accommodating with respect to being sensitive to tenants needs and in working out deals with them to give them short-term rent relief. That is probably pretty consistent across the market,” adds Shields.

So far, the company hasn’t seen any reason to shift its strategy during the pandemic; however, it has slowed acquisition activity. “There seems to be a fairly wide bid-ask spread in the market,’ says Shields. “You come into a market dislocation like this, and buyers have a tendency to assume that there are a lot of bargains to be had, and as a result, they start to move down their pricing. Sellers don’t fall in line that quickly. It is going to take a little time for the transaction velocity to pick back up.”

It terms of underwriting, Griffin expects rents to remain flat, and they have shifted expectations and business plans accordingly. “We have re-underwritten rents with the expectation that we are going to see relatively flat rental rate growth, but even across our multifamily portfolio we are seeing modest increases in rents,” he says. “I am cautiously optimistic that once we get to the other side of this, we are going to be in pretty good shape.”