Will COVID Shake Loose Large Portfolios?

As the economic ramifications of the COVID shutdowns start hitting large property owners, Michael T. Fay, principal, managing director and global head of Avison Young’s asset resolution team, wonders if bigger deals are on the horizon. 

“I think we’re going to see some larger portfolios trading,” Fay says. “It will probably be a shifting of assets, where they [sellers] will take X amount of properties on the lower end [of performance] and sell them in one fell swoop. Then those organizations [acquiring the assets] will deal with them individually.”

While performance may be the main factor determining what a company might sell, geography may also play a significant role. “I think we’re going to see companies looking at their regions and saying, ‘Okay, we’re going to get out of this region and go to another region or even asset class,’” Fay says. “I think we’re going to see a lot more companies selling out of entire asset classes.”

As an example, Fay points to a retail REIT that might have unanchored assets in a particular area. “If all of a sudden, it [the REIT] can fill them [the anchor stores] up, they could sell those off, get the cash, turn around and deploy it elsewhere,” Fay says. “They could go to certain regions across the U.S. or even to a different investment.” 

Fay could also see groups moving out of entire asset classes. “I think some people may make a shift from multifamily to industrial because industrial is so hot,” Fay says. “I think we’re going to see some of those asset shifts.”

While large portfolio sales make headlines, mergers and acquisitions can cause huge changes in geographic markets and asset classes. Eventually, Fay thinks there will be more of those deals as the downturn drags on.

“I think you’re going to see some other interesting real estate plays where one REIT will buy another REIT,” Fay says. “I just don’t know which ones yet. Companies are going to look hard at mergers and acquisitions. As opposed to buying a certain amount of assets, they’ll just buy an entire company.”

But those acquisitions may not just be of other real estate owners. If a REIT wants to try to duplicate Simon Property Group’s strategy of buying retailers, like Taubman Centers Inc., there could be plenty of opportunities.

“They’re going to look differently at these larger box stores and retail tenants and look at how they make something different,” he says. “So I think there’s going to be a lot of opportunities in many forms.”