In Wisconsin, COVID-19 Affected CRE Market, but Industrial Sector Fared the Best

The COVID-19 pandemic has slowed commercial real estate activity nationwide, with the industrial market faring the best, conditions that have equally affected the Wisconsin market, according to a 2020 Midyear Investment Report from Colliers International.

However, the pandemic has affected the office, industrial market, multifamily and retail markets nationally and in Wisconsin, the global commercial real estate company said in the report written by Jennifer Huber, a senior investment sales analyst in Milwaukee.

Noting that the economy went from “thriving to barely surviving” in March, due to stay-home orders imposed to slow the spread of the coronavirus, the impact of the pandemic and recession on the commercial real estate market was immediate, and buyers and sellers paused as the market tried to understand how pricing would be affected, Huber wrote.

In the office market, sale transactions were lethargic during the first half of the year, and office volumes dropped considerably in June, totaling $3.6 billion, down 79% from a year ago, she wrote. In Wisconsin, only six office investment transactions were completed during the first two quarters of the year, a 67% decline when compared to the last six months of 2019.

“The deep-cutting impact of the pandemic and the resulting stay-at-home order from the [Wisconsin] governor’s desk caused landlords to retreat into asset-defense mode,” Huber wrote.

She wrote that office investors were preoccupied with rent collections, communication with tenants and providing a safe work environment, while lenders were processing Payroll Protection Program loans for tenants, so eyed new real estate loans more conservatively.

On the other hand, the industrial sector in Wisconsin and nationwide has shown “unparalleled resilience” when facing the economic troubles and the impact from COVID-19.

Due to demand in e-commerce and “rapid absorption” from Amazon and other online retailers, the retail market in Wisconsin “has not flinched,” Huber wrote.  During the first half of 2020, a total of 16 Industrial investments totaling $576 million were closed, compared with 14 transactions totaling $316 million in the second half off 2019.

Two large and significant transactions accounted for three-quarters of the $576 million total during the first half of 2020 — Blackstone’s purchase of a $391.5 million portfolio from Centerpoint Properties, and Prologis’ sale of its Amazon campus in Kenosha for $176 million.

Huber wrote that investors are “flocking” to multifamily and industrial assets, because retail and hospitality sectors are in “dire straits.” In Wisconsin, she wrote, the most notable transactions in that sector closed in either January or February, before the pandemic started to impact business in Wisconsin.

While retail investment sales nationally during the first half of the year totaled $201 million, 70% of them closed prior to the COVID-19 shutdowns in mid-March. A majority of the investments were essential single-tenant net lease properties, such as drug and grocery stores.

Looking ahead to the second half of 2020, Huber wrote that she expects a trend of “modest decentralization” by tenants as they endeavor to expand their space while also providing safe working environments at reasonable cost. Overall, though, the impact of the pandemic on the office market may take years to sort out.

The second-half forecast for the industrial market in Wisconsin is looking “very favorable,” but transactions volume in the multifamily sector will be limited by the assets available to trade, she wrote. Forecasting in the retail market is difficult for the second half of 2020, she wrote, because the market is changing rapidly, although buyers remain interested in net lease essential retail properties.

Huber also noted that according to the Colliers Structured Finance Advisory Group Q2 Debt Capital Markets Update, overall activity in the CRE debt capital market has increased significantly during the pandemic. That’s largely due to the current low interest rates and revised underwriting criteria aimed to mitigate concerns about the pandemic and its effect on the economy.

“Multifamily, industrial and office opportunities are currently the focus on most new loan origination interest with retail and hospitality still struggling to gain momentum, she wrote, adding that local and regional banks continue to be more active than larger national banks.