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How real estate will change after COVID-19

Yahoo Finance’s Alexis Christoforous and Brian Sozzi speak with Fundamental Equity Managing Director Nora Creedon about how the real estate industry can make a comeback after COVID-19.

Video Transcript

ALEXIS CHRISTOFOROUS: As the economy wades its way into reopening and we head down our road to recovery, sectors-- a whole bunch of different sectors-- are getting hit from all sides, especially real estate, hotels, retail stores really hurting right now. So what will the real estate industry need to do to come back?

Joining us now to talk about this is Nora Creedon. She's Managing Director, Fundamental Equity at Goldman Sachs Asset Management. She joins us on the phone. Nora, good to have you with us today. You say there are segments of real estate that are actually poised to benefit from this crisis. Outline for us what those sectors are.

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NORA CREEDON: That's right, Alexis. And thanks for having me on. So in the publicly traded real estate companies, we've seen equity declines of about 25% this year. That's up off the bottom of 45% declines we had at the end of March. But as you note, that doesn't really tell the story of real estate, because there's huge bifurcation under the hood.

So we've got about a third of the real estate world that is very directly negatively affected by the lockdowns. The hardest hit sector is hotels, which is probably obvious. We had a complete freeze of the global travel industry. We've got many hotels literally shut down. And it's very unclear how business travel and conferences will resume in a post-COVID world.

Retail real estate that you mentioned also nearly as tough as hotels. Most malls in the US were closed during this pandemic, and many shopping centers only had their essential stores, like grocery, open. And in contrast to the hotels, where they weren't losing business to another form of lodging, with retail we know the consumers replaced whatever spending they were still able to do in online form. So e-commerce penetration is undoubtedly going up through this. We may have accelerated years into that path that the consumer was already on.

We can come back and discuss some other areas of real estate that have been very sharply hit-- so senior housing facilities, office real estate, some other areas as well. But on the other end, we've got about a third of the real estate world that's actually seeing benefits from this strange new world that we find ourselves in. Here I'm talking about cell towers, data center companies, industrial logistics real estate.

I'm picturing right now the viewers of this show. They're probably working from home. They're tuned into Yahoo Finance. They're connecting on Zoom calls and Google Meets. If they have children, they're running online distance learning programs. Maybe they take a break from all this work and they do an online yoga class, because their favorite workout studio is closed. They're ordering their food, their essentials online. If they have a minor medical issue, maybe they're doing a virtual visit with their doctor. And at the end of that long day, they're going to download a couple of movies on Netflix.

So when you think about all this activity, it is just a massive amount of bandwidth needed, and mobile connectivity and cloud connections. And we have companies we can invest in in the REIT space that own these cell towers and small cell sites and data storage facilities. And these companies are doing really well.

And on the industrial logistics side, these companies, they own warehouses, last-mile distribution facilities. They were already doing quite well going into this. And the acceleration of that e-commerce trend I mentioned earlier is a direct benefit to their business.

One interesting stat on that is that it actually takes about three times as much physical space to manage your e-commerce distribution than traditional brick and mortar retail, because of the complexity of shipping single items to an end customer versus distributing goods between warehouses and stores. So the trend toward more and more e-commerce, it's great for logistics real estate.

ALEXIS CHRISTOFOROUS: Wow, Nora. I feel like you're in my house. You just described the day in the life of me and my family, the way we're using all of our data and our bandwidth. I think you hit the nail on the head. But what about office space, workspace going forward? Before this pandemic, shared workspace was the thing, right? And now, people want to get as far away from each other as they can because of the pandemic. So is the future of those shared workspaces really doomed at this point?

NORA CREEDON: Right. Well, look, on the one hand, I wouldn't extrapolate all of the current behavior into the future forever. I do believe humans are social creatures. We thrive on interactions. And I think you can see from some of the behavior in reopened states, there is a strong desire to return to our normal way of living.

But we are spending a lot of time discussing what is the new normal, or should I say the new abnormal, for office real estate in particular. The bigger cities like New York that are dependent on mass transit systems to get their employees to work-- the technology that exists today, it's incredible, right? It's permitted so many white collar employees to work from home effectively. And it would be sort of crazy for us to come through this experiment and think this won't cause certain companies to rethink their real estate footprint. You've heard that from many CEOs in the last few weeks.

And rethinking that footprint could mean everything from permitting employees to work from home to relocating more of the workforce to more suburban office locations, places where people can drive to work, where it's more affordable to have real estate that allows people to socially distance at work. And that is all very possible.

The one offsetting positive for office is that the push towards more and more densification, more people crowded on open trading floors, and companies putting a lot of people in small square footage-- that has likely come to an end. And I should say that, look, the impacts of these shifts, if they play out, it's way beyond just office. You know, think about the residential impacts in cities like New York, the street retail that supports the workforce in urban cities. If this occurs, there will be shifts well beyond just the office business.

BRIAN SOZZI: Nora, real quickly, what you're seeing on the mall really rings home true to me. Lots of stress on the mall. We continue to hear that. What does that mean for the commercial real estate market this summer, just in terms of the securities trading?

NORA CREEDON: In terms of the securities trading whether people will have more time, you mean for trading because they're not in the mall?

BRIAN SOZZI: Well, just the commercial mortgage-backed security market. Should we expect a pretty sizable selloff?

NORA CREEDON: Sure. So yeah, there is a good portion of the retail real estate industry that is securitized in the commercial mortgage-backed security market. And so far, we have seen some initial indications in the April numbers that some owners of malls are requesting relief. But that's all we've seen so far. So I think the story there is still to be played out.

And I think we'll know a lot more in the next six weeks as we get the reopenings of these retail real estate facilities and see, how do the tenants proceed to pay rent? And then I think we'll have a lot more color on that.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Nora Creedon, Managing Director, Fundamental Equity at Goldman Sachs. Thank you so much for being with us. Great insights this morning.

NORA CREEDON: Thanks for having me.