As vaccines become widely distributed, some industries hit hard by the
While some market watchers contend that oil and gas producers could
Urban office buildings may suffer
That would mean lingering
Major cities are vulnerable because they are typically the most expensive and because of a pandemic-induced exodus to more spacious suburban markets.
“It’s really hard to see when we could get back to normal” in terms of demand for office space and business travel, said Chris Nichols, a banking strategist and head of capital markets at the $37.8 billion-asset South State in Winter Haven, Fla.
The pandemic created a divide between sectors that benefit from more digitalization and those harmed by fundamental changes in working practices and behavior, industry experts said.
While credit quality has largely held up — analysis by Janney Montgomery Scott found that deferrals at the banks it covers have gotten as low as 2.8% of total loans in the fourth quarter — companies in hard-hit industries will likely struggle as
“I still think we’re in for a bit of a
Nichols said he expects a 20% to 30% decline in loan demand for office buildings for the foreseeable future, with a potential spillover into multifamily and retail. Business travel, he said, could face comparable strain, hurting hotels and airlines.
Chris Maher, chairman and CEO of the $11.7 billion-asset OceanFirst Financial in Toms River, N.J., provided a similar assessment.
“I think it will take offices a lot longer to bounce back in urban than in suburban markets,” Maher said. This “will have a big impact on retail properties dependent” on office activity “and could weigh on multifamily in urban cores as well.”
Even if a commercial property — whether office or retail — gets back to 80% of its pre-pandemic revenue levels, it would still struggle to generate profits, service debt and chart a long-term growth plan, Maher said. Business plans and borrowing levels, he said, were based on pre-pandemic revenue levels.
Bankers said hotels dependent on business travelers will almost certainly have to adapt their business models or wrestle with revenue headwinds for years. And these businesses will be clawing out of deep holes.
The surge in virus cases in recent weeks demonstrated how severely the pandemic has hampered hotels, said Brian Martin, an analyst at Janney Montgomery Scott. Though hotel occupancy improved in the third quarter as outbreaks eased, “hotel bookings are falling” as the temperatures drop, he said.
Occupancy levels reached a pandemic high of about 50% in October but have since fallen to the low 40s, according to the data analytics firm STR. Occupancy dropped by more than 30% in November from a year earlier, to 43%, while revenue per available room was cut in half.
Though
“The concern is, with oil, is there some kind of permanent reset when it comes to business travel?” Thompson said. “Will there just be a lot less flying for business and, possibly, a lot more people telecommuting to work and not driving into the office every day? Some of the demand we’ve lost could be hard to get back.”
A broader shift to renewable energy sources such as solar and wind under the incoming Biden administration could add pressure.
“I think there is optimism” among banks “that we’ll see a sustained recovery in 2021,” Thompson said. “But I don’t think a lot of people are confident yet in how strong that recovery will be for the hardest-hit sectors.”