For all of the sectors that were hit hardest by the COVID-19 crisis, there will be investment opportunities either building on what the assets were or converting them for new uses, said Jon Pliner, New York-based senior director and head of delegated portfolio management in the U.S. at Willis Towers Watson PLC.
"It's just a matter of what they are and when," Mr. Pliner said.
Executives at PGIM Real Estate are just starting to "dip their toe in the water" in some of these out-of-favor asset classes, said Eric Adler, London-based president and CEO of PGIM Real Estate and chairman of PGIM Real Estate Finance.
Starting at the end of 2020, "when we were comfortable the worst was over, we were hedging our bets on where COVID might be," and PGIM began cautiously searching for deals in sectors such as office and hotels, he said.
The trends in place before the pandemic were accelerated by the COVID-19 crisis, added Josh Herrenkohl, New York-based senior managing director in the real estate practice at FTI Consulting,
For example, the already underperforming retail sector was hit hard during the pandemic as more people relied on online shopping, but grocery-anchored retail "has been largely unscathed," Mr. Herrenkohl said. Class C office buildings, which are the lowest quality properties in less desirable areas, were already not doing well before the pandemic, "and in large part have gone off the cliff" as a result of the pandemic, he said.
"I'm not a believer in the demise of retail," Mr. Herrenkohl said. However, online and in-store retail will continue to coexist with some properties repurposed into technology-supporting uses, such as data centers, as well as to serve as distribution centers and pickup sites. Retail will change from a place where people come to browse to a spot to pick up items after shopping for them online. Retail properties such as shopping centers will be "less a point-of-sale and more use of retail to facilitate a process," Mr. Herrenkohl said.
Tingting Zhang, El Segundo, Calif.-based founder and CEO of TerraCotta Group LLC, also has not counted out retail, but her firm typically forms data-driven views of real estate on a neighborhood-by-neighborhood, property-subsector basis.
"The convergence of the physical retail and e-commerce is really about access," Ms. Zhang said. "Retail is not an irrelevant asset class, but there is a bifurcation between winners and losers."
In retail, TerraCotta has focused since 2004 and 2005 on investing in neighborhood centers, she said.
"Retail winners usually are very well located and digitally oriented, such as Amazon Fresh stores," Ms. Zhang said.
In Europe, King Street executives have seen an increase in office leasing, but these days tenants are most interested in boosting employee retention by choosing a best-in-class space that encourages collaboration and team building, said Paul Brennan, London-based managing director at King Street Capital Management LP.
"There is less sensitivity on price for the best quality stuff," he said. King Street has been lending to properties in the hardest hit areas, such as hospitality and high-end residential properties, Mr. Brennan said.
"There was a huge capital vacuum at the end of last year before the vaccine rollout and before air travel began to ramp up," he said. Lenders were not willing to lend even to high-quality hotel assets. So, King Street stepped in to lend to distressed "trophy assets," where the property was still strong but there was some dislocation in the capital structure, Mr. Brennan said.
