As the administrator for a wide variety of commercial real estate funds, Phoenix American has a unique perspective on the unfolding impact of recent events on this asset class. From our fund administration role as well as from consultations with sponsors, investors and partners in the industry, we have seen the shock of the economic shut-downs absorbed and addressed by real estate fund sponsors of every size, with portfolio assetsof every property type, in regions throughout the country. From what had been a strong beginning to the year, we witnessed unprecedented challenges for fund sponsors emerge in the wake of the COVID-19 pandemic crisis. From this one cause, we see a variety of effects emerging for commercial real estate funds going forward.
Heading into 2020, commercial real estate asset values were at new heights, driven during the long economic expansion by persistently low interest rates, an influx of capital and strong fundamental performance. Equity capital gravitates to a product that provides dividends well in excess of sovereign and corporate bonds, tax efficiency and good prospects for appreciation. Commercial mortgage debt also rose to an all-time high $3.7 trillion, with stellar performance on loans originated after 2009.
Market demand for commercial space was strong as well. Rents grew steadily – depending on the asset class – at a moderate to robust rate. The only part of the market not busy in recent years has been workout specialists and high-yield vulture funds, who have had very few assets from which to choose.
The Covid-19 pandemic changed everything. States enacted shelter-in-place policies to stop the spread of the virus, forcing everything from businesses, schools, entertainment, to medical and personal care establishments to close throughout the country. Through mid-May, more than 33 million Americans had filed for unemployment benefits, pushing the unemployment rate to a staggering 14.7 percent.
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