Prior to the outbreak of the coronavirus, most experts and economists believed the economy was in a pretty good state.

A panel of experts from JLL, a leading commercial real estate company, elaborated on that notion and addressed the challenges the economy and various markets are now having during the COVID-19 pandemic.

“The medical office and healthcare sectors had a strong finish to 2019, with similar plans for 2020,” JLL Executive Vice President Ken Gill told Valuation Review. “According to data from Revista, occupancy rates for medical offices ended 2019 just below 92 percent, which was consistent with what we saw in 2018. Lease rates showed 2.0 percent to 2.5 percent year-over-year growth and expenses were stable.

“Total investment volume dipped slightly to $11.4 billion from $12.4 billion; however, the transaction volume in the fourth quarter was the highest it has been in over two years. Sale prices grew slightly on a price-per-square-foot basis, and cap rates continued to decline, averaging 6.3 percent overall for the medical office sector. Debt and equity were widely available and the demand for healthcare properties outweighed the supply, indicating continued future growth in the sector.” 

Gill said that since the COVID-19 outbreak, many market participants are taking a wait-and-see approach. This includes buyers, sellers and lenders. It is anticipated that overall deal volume will temporarily slow down, along with re-pricing of some deals currently in the pipeline, although data points to support this are scarce at the moment.

Demand for core assets in top markets will continue to be strong, and pricing is not expected to decline, Gill went on to say. These core assets exhibit high occupancy, longer term leases and credit-worthy tenants. Demand for core-plus and value-add assets may decline in the short term as the buyer pool and financing options are reduced.

Access to debt capital still is widely available, he said, thanks in part to the actions by the Fed; however, spreads have widened, and we expect underwriting criteria will tighten through the remainder of 2020.

“Before the outbreak, the multi-housing real estate market was in a very healthy state. Supply and demand were generally in balance across the country, despite years of significant new construction,” JLL Managing Director Tony Lenamon said. “The driving force for apartment demand is the creation of new jobs. Before the COVID-19 outbreak, the economy was creating hundreds of thousands of new jobs, which allowed the absorption of hundreds of thousands of new apartment units. Currently, approximately 22 million Americas have filed initial jobless claims.”

Lenamon said this most likely will have a negative effect on the apartment market in the short term but likely will improve as Americans return to work.

JLL Managing Director Brian Chandler said from a seniors housing perspective, the industry finished strong in 2019 as transaction volume totaled $15.6 billion, which includes both seniors housing and care. Last year, seniors housing transactions were the highest reported since the first quarter of 2016 at $10.6 billion.

At that time, he said, capital sources and debt liquidity were abundant. Occupancies in primary markets began to show modest growth, new construction starts were beginning to decline and the rate of absorption was increasing. However, rent growth was tempered because of the slight surplus of new supply in certain markets.

Lastly, seniors housing market fundamentals improved as there was a slight compression in capitalization rates as well as a moderate increase in price per unit.

“Because of COVID-19, the seniors housing industry will face various challenges,” Chandler said. “Operators have been implementing best practices to protect frontline caregivers, residents and their families as well as working to improve staffing pressures. This takes time, and procedures are changing frequently for these operators. New move-in rates are slowing, and occupancy rates are thus expected to be impacted in the short-term. Additionally, new construction of seniors housing projects will be impacted until we know the full effects of COVID-19 on the U.S. economy. 

“Although there are numerous capital and equity sources for this space, transactional activity has temporarily slowed as it is becoming challenging for investors to tour properties due to isolation and social distancing guidelines,” he added. “These sources are now more cautious on their due diligence and underwriting of assets. Although loan spreads are becoming wider and there are additional loan risks now being associated with this space, accommodations are being made available. Several operators are providing virtual tours for potential new residents and other third parties and doing so successfully. It should also be noted that there have been declines in stock prices for healthcare REITs with seniors housing exposure. Overall, it is still too soon to measure the long-term impact in this space, but in the short term, the $2 trillion CARES Act is now in play, which contains support for seniors housing operators, including healthcare grants and low-interest loans.” 

Looking ahead, there will be economic and other changes needed to keep the markets thriving. Kill pointed out that with the recent rise in unemployment because of COVID-19; access to healthcare for some people has been compromised because of their loss of job-related healthcare benefits.

“Restoring jobs and benefits will improve the county’s access to healthcare services and help keep our health systems strong,” Gill said. “As the economy slowly re-opens and begins its recovery, healthcare services are expected to ramp up quickly, as they are non-discretionary for most people. However, the recovery in this sector will be dependent upon the restoration of health benefits for those that have lost access due to unemployment.”

Lenamon said there is a direct correlation between the job market and demand for apartments.

“Higher unemployment could mean delayed or missed rent payments from some renters, which will challenge landlords to make mortgage payments on their apartment loans,” he said. “This, in turn, would negatively impact lenders. This constriction can ripple across credit markets, as lenders may be reticent to refinance loans until the economy stabilizes. Once the employment rate begins to recover and tenants who lost their jobs are again receiving paychecks, they can pay rent to their landlords and the system can rebalance and grow.”

Chandler stressed that one of the primary concerns prior to COVID-19 for seniors housing and care operators was the challenge of staffing communities given upward wage and turnover pressure from a robust job market. Now with a larger pool of workers seeking opportunities in light of recent labor market volatility, seniors housing operators are hiring at a rapid pace to alleviate staffing pressures caused by COVID-19 and meet the elevated demand of healthcare.

He also mentioned that occupancy may be impacted, as family and friends are presently assisting with the care and socialization of potential seniors housing residents because of the outbreak. Therefore, a normalized employment rate is helpful to ensure stabilized occupancy, Chandler said.