How COVID-19 is transforming the real estate sector

Walker & Dunlop CEO Willy Walker joins Yahoo Finance Live to discuss how the commercial real estate space is faring as COVID-19 cases continue to surge across the country.

Video Transcript

- That's a little more normal. Post-vaccine, there's going to be a lot of questions about what this means for the commercial real estate sector, for some of these struggling buildings because of offices that are no longer occupied, as well as malls with retailers that have been struggling for some time. Let's bring in Willy Walker. He is the CEO of Walker & Dunlop.

Willy, you've got some really good visibility on this. The return to activity is certainly not expected until the second half of the year. But what are the conversations that are now happening as a lot of these businesses try to position themselves for what they expect will be a bounce back in demand?

WILLY WALKER: So I think if you look at the market, the commercial real estate market by asset class, as we've gone through the pandemic, the two asset classes that have performed the best are industrial and multifamily-- industrial because they're full, moving Amazon deliveries across the country, and multifamily because people need somewhere to live. The asset class that sort of is in the middle is office because office leases are long-term. And so Walker & Dunlop has 43 offices across the country. We're still paying all the leases on those offices even though we're only at about 10% occupancy across the country.

Office will get bridged through the pandemic because of the long-term nature of those leases. And then the two asset classes that are struggling the most, which is no surprise to anybody, are hospitality and retail. Certain retail, big-box retail, is doing, actually, quite well. Smaller retail, strip retail, is suffering because those smaller retailers haven't been able to survive in the pandemic.

And then on hospitality, right now through 2020, hotels were at about 50% occupancy overall. Some well-located hotels in resort communities have actually held up occupancy very well. But then big convention hotels and center-city hotels have been at occupancy rates that are 10%, 15% and are really struggling.

- Yeah. And when we look at your stock, too, I mean, it's kind of trading well, higher after we kind of saw that it was going to be the Biden team that was going to win the presidency. We know what he has planned when it comes to, maybe, some more stimulus here, a relief on the front when it comes to a lot of people facing rent issues. When you look at that, how real was the risks in your mind when you were kind of looking at the pandemic, staring that in the face, what you saw there in that space, and what you think about the recovery now as you see it unfold?

WILLY WALKER: So I'd love to think that what's driven our stock is our Q3 performance and our insights into what we did in Q4 rather than the Biden administration getting elected. I don't think that the public policy around multifamily housing is going to change that dramatically where people invested in Walker & Dunlop due to the Biden administration being elected. With that said, you have to also keep in mind that the vaccines were coming out of clinical trials at the same time as we announced earnings and at the same time as the presidential election was happening. And so what you've also gotten is some real clarity on when people will get back to using commercial real estate, which we are obviously a very large financer of that.

I think the other piece to it is now that there is end in sight as it relates to the pandemic, people are looking at the loans that are outstanding, that have been struggling. And what we found from all the bank earnings last week is that the banks are incredibly well-capitalized and are not having the difficulty in their consumer finance loans that many had predicted they would have, in student loans and credit card loans. And as a result of that, I think the general attitude is that if you have a struggling commercial real estate loan, and it's held by a bank, or a life insurance company, or one of the GSEs, Fannie and Freddie, that you can go and ask for forbearance, that they're going to work with you, they're not going to foreclose upon you. And that's a dramatic difference between this crisis and the great financial crisis, which started with the financial services' institutions calling loans.

- That's certainly some relief, especially when we we're talking about a day of reckoning, if you will, the concern about all of these delayed payments really leading to default on the other end. I want to get back to what you said about who's actually been struggling on hospitality as well as retail. Not a surprise there, but there's been a lot of talk about how those spaces will pivot moving forward.

Many of these malls may not survive. A lot of these hotels have already been working with the city, for example, in some areas to try and find different uses for them. What are you seeing on that front, particularly with retail?

WILLY WALKER: So on the retail front, you have to keep in mind that in Q2 of 2020, in the depths of the pandemic when our economy was shut down, online retail sales peaked at 16% of total US retail sales. And the other 84% of retail sales were done through bricks-and-mortar. In Q3, that number had dropped down from 16% down to 14.5% of total retail sales being done online.

And so I do think it's important for people to understand that as much as all of us thought in Q2, when we were all locked down, that, basically, the only retail we were getting was coming by the UPS delivery truck, that that only accounted for 16% of total US retail sales. And so while there are clearly retailers that are still struggling today and are having a difficult time getting back up and going-- as I came into my office today, I noticed in downtown Denver, a number of the restaurants are still shuttered. A lot of the retail is still shuttered.

But at the same time, big-box retail is still moving forward very, very well. And so a lot of people have been calling for aid to small businesses. And those are the pizza parlor, the restaurant, the nail salon, people like that. And that's where I think the next stimulus bill is going to be really targeted.

As it relates to hospitality, as I said previously, it's at about a 50% occupancy rate. I don't think that moves between now and when the vaccine gets more widely distributed. And then you're going to see, really, hot spots where people feel comfortable traveling with their families. So I think leisure comes back first before business.

But the other thing that I think is important to keep in mind is that a lot of people have said that the overnight business trip, to go win a deal, or meet with a recruit, or meet with your team, is a thing of the past. I could not disagree with that more. Because I think that the competitive landscape today allows all of us to interact via Zoom. And therefore, that's the competitive landscape that we all are using.

But the moment that a competitor of Walker & Dunlop's travels to a city to meet with a client to win a financing or to sell a property, and I have the opportunity to either Zoom with them or get on an airplane, and the competition has gotten on an airplane, I'm getting on an airplane. And I'm booking that hotel room. And so I think there is a disconnect right now where people sort of say, we are going to be in this operating environment indefinitely. I think it snaps back very, very, very much quicker than most people are projecting.

- Yeah, I mean, we'll see. It'll take that first company to greenlight that trip to see it all start in motion. But no doubt, that is the hope out there for a lot of people. Willy Walker, Walker & Dunlop's CEO, I appreciate you coming on here to chat with us today.

WILLY WALKER: Thanks very much.