The Wall Street Journal - 11.03.2020

B6| Wednesday, March 11, 2020 ** THE WALL STREET JOURNAL.**

As the spread of the coro-

navirus disrupts travel plans

and pummels shares of hotel

owners, some corners of real

estate are emerging as safer

places for investors.

A number of real-estate in-

vestment trusts tend to out-

perform the broader stock

market during times of eco-

nomic uncertainty because

landlords with longer leases

often can count on a more sta-

ble cash flow than manufac-

turers or financial companies.

REITs are more sensitive to

interest rates than most com-

panies because of the amount

of debt they use to distribute

income as dividends. That

makes some of these compa-

nies among the bigger winners

when the Federal Reserve cut

short-term rates last week.

The past two weeks have

borne out these factors, as in-

vestors flocked to owners of

self-storage, rental-housing

and infrastructure properties

that have lower tenant turn-

over, making them typically

less vulnerable to economic

disruptions.

Since the stock-market sell-

off gained steam on Feb. 24,

the FTSE Nareit All REITs In-

dex has fallen 12% and the S&P

500 has fallen 14% over the

same period. Within real es-

tate, the self-storage sector

was the top performer, with

returns largely flat.

Not all real-estate owners

stand to gain. Those with expo-

sure to development projects or

borrowing needs face more

challenges, analysts said. Lend-

ers could become more conser-

vative in rolling over debt,

while developers could face dis-

ruption if their construction

workers fall sick or if building

supplies are delayed.

Analysts are skittish about

office and warehouse owners,

despite the multiyear leases on

their books. Their fortunes are

more closely linked to eco-

nomic growth, which investors

anticipate will suffer if the epi-

demic persists. Office-tower

owner Vornado Realty Trust

has fallen 21% and industrial

property landlord Prologis Inc.

has slid 19% since Feb 24.

In the case of self-storage

units, people still need a place

to park their things and the

costs tend to be affordable for

most customers, said Ki Bin

Kim, managing director at Sun-

Trust Robinson Humphrey Inc.

overseeing REIT Equity Re-

search. “It doesn’t rely on foot-

traffic volume, unlike other real

estate such as movie theaters

or retail that depend on people

being comfortable in crowded

areas,” said Mr. Kim.

Since Feb. 24, among shares

of self-storage landlords, Public

Storage rose 1.8%, while Extra

Space Storage Inc. and CubeS-

mart have fallen 2%, a limited

loss compared with the broader

market selloff. Shares of infra-

structure and residential REITs

have held up better against the

broader market, falling be-

tween 3.3% and 10%.

Communication networks

still function even with people

staying home, so owners of cell

towers and fiber networks are

less likely to be directly af-

fected. Residential property

landlords say rental housing fo-

cused on the moderately priced

dwellings tends to hold steady

during recessions.

Within the residential sector,

shares of mobile-home-park

owners were less affected on

the down days, falling by 4.5%

since Feb 24.

BYESTHERFUNG

Storage

Firms and

Rentals

Lure Bets

sure travelers, but also busi-

ness travelers and groups.

“We don’t think of hotels

and vacation homes as two dif-

ferent businesses,” said Oyo’s

chief executive, Ritesh Agarwal.

From a regulatory stand-

point, the vacation-home

rental business faces fewer ob-

stacles than the equivalent

short-term rentals in major

U.S. urban centers, Mr. Agar-

wal said. A number of cities

have banned certain types of

commercial short-term rental

listings over concerns that

they reduce housing supply

and push up rents. But vaca-

tion homes in smaller towns

often face fewer restrictions.

Oyo, which was founded in

2013, has raised more than $3

billion in venture capital and

counts Japan’s SoftBank Group

Corp. and short-term rental

listing company Airbnb Inc.

among its investors.

While it has been one of the

world’s fastest-growing hotel

companies, more recently it has

tapped on the brakes. Oyo is

laying off 5,000 of its roughly

30,000 employees, pulling out

of numerous cities and signaled

that it needed to moderate its

breakneck growth pace.

“There has been a signifi-

cant amount of feedback

among high-growth companies

world-wide, basically saying

that the market appreciates a

trend towards profitability

very significantly,” Mr. Agar-

wal said in an interview.

He said the company’s more

mature Indian business has

seen losses shrink, but “there is

a lot more to be done.”

Oyo’s foray into the U.S. va-

cation-rental market comes as

the novel coronavirus epidemic

is upending the hospitality in-

dustry. The recent spread of

the virus in Asia, Europe and

the U.S. has led businesses to

restrict travel and caused tour-

ists in China and elsewhere to

cancel vacation plans.

But the recent disruption

aside, short-term rentals aimed

at vacationers have been on the

rise. Last year, there were

414,845 short-term rental list-

ings in markets where leisure

travel dominates, up more than

a third from 302,220 in 2017,

according to data firm Trans-

parent Intelligence Inc.

Other startups are compet-

ing in the vacation-rental

field. Vacasa manages more

than 23,000 listings in the U.S.

The company raised $319 mil-

lion in a venture funding

round last year, valuing it at

more than $1 billion.

The giant Indian hotel com-

pany Oyo Hotels & Homes is

expanding its vacation home-

rental business to the U.S., an-

other sign that competition in

this corner of the lodging mar-

ket is intensifying.

A number of venture-funded

companies are looking to ex-

pand in the market for short-

term rentals, either managing

vacation homes or apartments

for their owners, or renting

apartments to sublet them as

de facto hotel suites.

Companies like Portland,

Ore.-based Vacasa focus on

nonurban vacation homes,

while companies like Sonder

and Domio are more focused

on urban apartments.

Oyo primarily manages low-

cost hotels, but the firm is

looking to bring its brand and

economies of scale into the va-

cation-rental industry. It en-

tered the European vacation-

rental market last year when it

acquired Amsterdam-based Lei-

sure Group for $415 million.

The company said it oper-

ates more than 50 vacation

homes in more than 15 U.S. cit-

ies and is looking to expand.

Oyo said it hopes to expand its

business by hosting not just lei-

BYKONRADPUTZIER

Indian Hotelier Looks to Enter

U.S. Vacation-Rental Market

Oyo said it hopes to expand its business by hosting business as well as leisure travelers.

OYO

FTSENareitEquity

SelfStorageIndex*

FTSENareitEquity

ResidentialIndex

S&P500

Performance since Feb. 21

Source: FactSet

0

–20

–15

–10

–5

%

Feb. 21 March 2

*Through Monday

The danger might be lower

if offices were designed differ-

ently. The Centers for Disease

Control and Prevention has

said the disease tends to

spread between people within

6 feet of each other and

through coughs and sneezes.

In a study of more than

1,800 Swedish office workers

that was published in 2014, a

group of researchers from

Stockholm University found

that open-plan offices lead to

more sick leaves. Among the

possible explanations is these

offices can be more stressful,

and risk of infection may be

greater. The study found of-

fices without assigned desks

lead to more extended sick

leaves, but only among men.

Tech companies often prize

open offices, and their work-

spaces in turn inspired others.

When Facebook announced

the design of its new California

headquarters in 2012, it said it

would be the world’s largest

open-office floor plan.

“The idea is to make the

perfect engineering space: one

giant room that fits thousands

of people, all close enough to

collaborate together,” the

company’s CEO Mark Zucker-

berg said at the time.

Last week, Facebook tempo-

rarily closed a Seattle office af-

ter a worker there was diag-

nosed with the disease caused

by the coronavirus. “We’ve no-

tified our employees and are

following the advice of public

health officials,” a Facebook

spokesman said in a statement.

Co-working companies

helped accelerate the shift to

densely populated offices. They

pay rent by the square foot but

charge membership fees by the

desk. That gives them an in-

centive to squeeze as many

people as possible into their

spaces. Co-working companies

often use as little as 65 to 100

square feet per worker, accord-

ing to brokerage Cushman &

Wakefield.

Some encourage proximity

in the name of creative inter-

action. WeWork has said it

made certain corridors nar-

rower to make it more likely

that workers physically run

into each other. “We’ll create

purposeful points of density,”

WeWork’s then-creative direc-

tor Justin Capuco told Wired

in 2018.

A WeWork spokeswoman

said the company’s mainland

China business suspended

events in common areas,

paused breakfast services,

asked tenants to receive fewer

visitors and is requiring ven-

dors to deliver any goods to

spots outside the offices.

“WeWork is prepared to ap-

ply these enhanced measures

in other locations depending

on the severity of the situa-

tion,” the spokeswoman wrote

in a statement.

In 2017, researchers placed a

harmless virus on a doorknob

and on the hand of a volunteer

in an 100-person office in Tuc-

son, Ariz. Within four hours,

the virus was on 50% of the of-

fice’s surfaces, spread by hu-

man touch, according to Mr.

Gerba, one of the researchers

who ran the study. It was on

desks and telephones and on

the office coffee pot’s handle.

“The coffee break room, ac-

tually, is more contaminated

than the restroom,” said Mr.

Gerba.

He said companies don’t

have to bring back cubicles and

private offices to stop diseases

from spreading. The study

found the use of hand sanitiz-

ers, disinfecting sprays and

wipes reduced the prevalence

of the virus by more than 85%.

conditions on borrowers,

while others have stopped

lending to hotel owners in cer-

tain markets.

These moves follow a sud-

den rise in corporate travel re-

strictions and a number of

conference organizers cancel-

ing annual events. Companies

like Hyatt Hotels Corp., Hilton

Worldwide Holdings Inc. and

Sunstone Hotel Investors Inc.

withdrew their 2020 guidance

due to uncertainties around

the epidemic, and as share

prices for hotel owners and op-

erators have been hit hard.

Still, hotel executives say

there is no sign of panic in the

debt market. Deals are getting

done and many properties

could withstand months of rev-

enue decline, especially if they

have floating-rate debt that en-

ables them to benefit from re-

cent declines in interest rates.

Elliot Eichner, a principal at

mortgage brokerage Sonnen-

blick-Eichner Co., said last

month his firm brokered a 10-

year mortgage on a hotel in

Austin, Texas, with a fixed in-

terest rate of 3.49%. He noted a

similar scare in the hotel in-

dustry occurred after the ter-

rorist attacks of Sept. 11, 2001,

and he expects hotel market

conditions to stabilize after a

few months, like they did then.

Yet even before the spread

of the virus, the hotel-debt

market was showing some

strain. At the end of the third

quarter of last year, 1.33% of

the hotel loans made by banks

were delinquent, more than

any other property type, ac-

cording to Trepp.

Banks and credit-rating

firms have started to stress-

test individual hotels and ho-

tel portfolios to see how they

would withstand declines in

revenue. KBRA Kroll Bond Rat-

ing Agency found the Four

Seasons Resort Hualalai in Ha-

waii might not generate

enough income to pay its debt

service if it were hit with just

a 15% decline in cash flow.

The property’s owner, MSD

Capital LP, didn’t respond to a

request for comment.

Hotel owners with heavy debt
loads are grappling with the
prospect the industry could fall
into a tailspin from the spread
of the coronavirus, leading to a
potential uptick in defaults.
The U.S. hotel industry
overall had about $300 billion
of mortgage debt as of the
third quarter of last year, up
7.8% from a year earlier and
14.2% from two years earlier,
according to data firm Trepp
LLC. New York, Los Angeles,
Las Vegas and other cities that
count on foreign visitors could
be especially vulnerable, ana-
lysts say.
Some investors who seized
on low interest rates and took
out big loans could be at risk,

said Neil Shah, president and
chief operating officer of Her-
sha Hospitality Trust , which
owns more than 120 hotels
across the U.S. His firm recently
sold four hotels in New York,
Boston and Miami, reducing its
debt by about $100 million.
“It really depends on how
far and deep this virus and its
containment run,” he said. If
the impact on the economy
and hotel demand lasts until
the end of the year, he pre-
dicted, there could be more
defaults.
In New York City, where a
supply glut has pressured
room rates and weighed on ho-
tel revenue, at least 21 mort-
gages backed by hotels were
on a watch list for potential
default as of February, accord-
ing to Trepp LLC, a real-estate-
debt analytics firm.
Some bank executives say
they are now charging higher
rates and imposing tougher

BYPETERGRANT
ANDKONRADPUTZIER

Debt Poses Threat

To Some Hotel Owners

As Markets Slide

THE PROPERTY REPORT

After years of squeezing
ever more workers into tighter
office spaces, companies are
realizing how efficiently the
modern workspace can spread
infections like the coronavirus.
Cubicles and private offices
have made way for open floors,
where a sneeze or cough can
circulate uninterrupted. Com-
panies have removed physical
barriers between employees,
encouraging them to socialize.
Between 2018 and 2019, the
average office space per seat in
North America fell 14.3% to
195.6 square feet, according to
brokerage firm JLL’s 2020 Oc-
cupancy Benchmarking Report.
Many companies have abol-
ished assigned seating, rotat-
ing workers through the of-
fice. That means workers in
many offices are now more
likely to touch surfaces con-
taminated by others. Popular
public areas are sometimes
more prone to spread germs
than restrooms, health re-
searchers say. Inspired by
startups and co-working com-
panies, more offices feature
snack bars, beer kegs and
other spots where workers can
mingle and spread germs.
Using less space per worker
has allowed companies to re-
duce their rent bills, and the
spread of disease was a minor
concern when the biggest dan-
ger was the seasonal flu. Now
that the more dangerous coro-
navirus is spreading, some
real-estate and health experts
suggest changes are in order.
“We spend more time in of-
fices than any generation in
history,” said Charles Gerba, a
microbiologist at the Univer-
sity of Arizona. “That’s really
why it becomes more impor-
tant to think about the spread
of disease and how we can de-
sign buildings better.”
Some U.S. companies are
shuttering offices and sending
workers home to prevent the
coronavirus from spreading
among their workers. Others
are distributing disinfecting
wipes and cutting down on
travel and meetings.

BYKONRADPUTZIER

Open Offices Spur Virus Worries

A WeWork spokeswoman said its mainland China business suspended events in common areas. A company branch in Shanghai.

PEI XIN/XINHUA/ZUMA PRESS

Offices without

assigned desks lead

to more extended sick

leaves, a study found.

$300B

U.S.hotelindustry’smortgage
debtasofthethirdquarter