Commercial real estate and COVID-19.

Byline: Dan Emerson

As 2020 began, Twin Cities commercial real estate agents had good reason for optimism after enjoying a record year in 2019, with sales totaling more than $1.2 billion. Tom O'Brien, executive director of capital markets for Cushman Wakefield, said new investor activity in the Twin Cities market was probably as high as he had seen in his career, which started in 1992.

In an interview, CBRE Vice President Frank Sherwood expressed similar sentiment: "We've never seen anything like this."

That was in February, before the rapidly spreading COVID-19 virus turned the world upside down. As in every other industry, Twin Cities real estate brokers are seeing the early impact of the coronavirus and developing recession, and they are bracing for the worst.

For the three-week period following Feb. 21, when stock markets started to slip, CoStar reported commercial property sales were about half what they were for the same period in 2019, based on its data. Multifamily property sales were down about 58%, industrial sales dropped by 63%, retail was down 61%, and hospitality was down 37%. Office property sales held up better, declining by only 4.4%, year-to-year.

The numbers indicate that "investors may be moving to the sidelines, at least temporarily, waiting for markets to stabilize," according to CoStar. The slowdown in property sales came in the midst of what could be one of the strongest first quarters on record, CoStar data shows. Office deals up to this point in the quarter have totaled about $25 billion. In the industrial sector, sales have reached nearly $30 billion "by far the best tally at this point in a quarter and more than the total volume recorded in most quarters."

Uncertainty over how long the COVID-related slowdown will last has upended the market status quo, said Andrew Rybcznski, a managing consultant with the CoStar Group. That uncertainty will cause buyers to reconsider, and a lack of liquidity will impact cap rates and pricing, he said.

"Investors and lenders are reassessing the market, which will leave some sellers without a way to divest," he said. "For many this won't be an issue, and holding through the slowdown is an option. For some, that won't be possible, as in the case of owners with upcoming balloon payments, 1031 exchange deadlines, or who are facing a sudden loss of tenant income. Those sellers will need to make their properties more attractive in order to entice sellers."

That often includes a decrease...