The COVID-19 Pandemic Has Caused Massive Levels of Upheaval to the Global Community. Here, We Explore Its Impact on Real Estate
There's no denying that COVID-19 has turned the world upside down. From stay-at-home orders to rising unemployment claims to major marketplaces now at a standstill, the global economy heading into late spring 2020 looks vastly different than it did at the end of winter less than 60 days ago.
Some areas are being hit much harder than others. Hospitality, travel, retail, and service industries are losing jobs and value. Some aspects of healthcare are thriving for all the wrong reasons, while others, such as elective surgeries, are at a standstill.
For real estate markets, however, the immediate impact has been less clear.
Before COVID-19, the overall real estate market was healthy. All sectors, from single and multifamily to commercial and industrial, were humming along nicely, with plenty of investment and high transaction volumes. The future, as it is for many across the world, is now less certain.
Let's take a broad look at where we are now and where we might be heading, as well as four things to know about COVID-19's effect on global real estate.
Expect the Coming Months to be Volatile
Commercially speaking, damage to retail and service sectors will bring harder times. Businesses that can no longer meet rental or lease obligations will create a ripple effect that is certain to last until at least the end of the year. Even with small business incentives, relaxed loan policies, and an influx of aid from the government, many small businesses that occupy commercial real estate space won't survive.
Conversely, businesses that are considered essential—grocery stores, big-box retailers, home service providers—may help buoy some portions of commercial real estate.
The office space sector will have to take a wait-and-see approach. The immediate future remains cautiously optimistic. Office-bound, white-collar employees and the firms that employ them are weathering the pandemic—for now. However, stay-at-home orders could lay the groundwork for a shift in how business is conducted in the future.
Many companies are looking at the pandemic as an opportunity to test their remote working capabilities. If productivity remains viable, firms might, in the future, look into reducing the physical footprint necessary to run their businesses, shedding costly rental and lease agreements.
The Future of Ecommerce is Now
A genuine bright spot amongst the pandemic has come in the form of e-commerce. With people staying inside of their homes, online shopping has not only become an essential business, but a fundamental way to pass the time. (Granted, this was true before COVID-19, but its ever-growing audience is now a truly captive one.)
From a real estate perspective, this opens the door for investors to shift their dollars into the already lucrative spaces of warehousing, logistics, and data storage. Going forward, anticipate future value in this growing "virtual" real estate marketplace. It will prove to be an excellent way to diversify one's real estate portfolio while also spurring on economic recovery.
Areas that have a strong tech presence are set to recovery much faster than those that don't. Jobs in these locales will be in higher demand once countries are ready to go back to work. Expect real estate investment in these tech hotspots to be even more feverish than they were before COVID-19, especially as priorities of how we live and work shift.
Luxury Single-Family Housing Will Rebound, Eventually
Let's narrow our focus even further and look at where we expect single-family housing, and more specifically, luxury housing to be in the coming months.
Perhaps the most immediate impact single-family real estate will see from the COVID-19 pandemic is volume. Overall, transaction volume is expected to slow down well into the summer. Why? It's a matter of movement—or lack thereof.
In the U.S., stay-at-home orders are in place in most cities and states until the end of April. Other locales, such as Los Angeles County, extended their orders until at least mid-May, with many anticipating theirs to last through the end of May.
Thanks to these current conditions, luxury single-family housing is expected to remain in flux. We'll see a buyers’ market but, more than likely, very few buyers will opt to venture out until the COVID-19 dust settles.
The bright side is that in the U.S. in particular, historically low-interest rates will help spur many buyers off the sidelines—even as most of the transactions, including home tours and contract signings, are done virtually.
Another aspect to look at is the type of properties that will become popular once market activity picks back up. Of course, luxury is luxury, and memories can be short, but look for a push on property transactions for less standalone homes in dense neighborhoods and more enclaves or compounds on lots with room to roam.
From elaborate home offices to large flex spaces to areas that can store plenty of food and supplies, certain homeowners like to prepare for the next disaster immediately after the most recent one has passed. Properties with the right amount of preparedness may very well prove to be the next hot luxury commodity.
Regardless of the type of luxury housing, there is a level of certainty that if a market was on sound footing before the pandemic, it has the best chance of quickly rebounding. Again, let's take the example of Los Angeles County.
Prior to the pandemic, while the luxury housing market had cooled to a certain degree, activity remained healthy. While bidding wars were a thing of the past, homes did not sit on the market for long, and sellers were able to command full asking prices.
Although it may no longer be the heady force it was prior to COVID-19, a luxury home in L.A. County and communities heading west towards the coast will always remain a solid investment.
Expect Force Majeure to Be the New Real Estate Buzzword
Even during what we once thought was the worst of modern economic times—the 2008 financial crisis and the Great Recession—these events did not shut down society as we know it. On the contrary, mortgage and rent payments were still due, and missing or defaulting on either carried hefty penalties.
COVID-19 and the government response to it signal that these are dramatically different times we're living in. Governments across the globe are extending helping hands to maintain some semblance of normalcy for borrowers and lenders alike.
For example, in the U.S. some states are suspending mortgages for those who have fallen under financial hardship during this crisis. The Housing Policy Council has also suggested that banks show leniency to their borrowers during this time.
Much of this is a preemptive attempt to avoid the catastrophic missteps from 2008 that resulted in thousands of families—from all income brackets—losing their homes and collapsing the economy.
But it's not just residential property holders who are receiving help. Commercial businesses— most notably small operations with fewer than 500 employees—are seeing assistance through paycheck protection, loan advances, bridge loans, and debt relief.
Several cities in the U.S. have instituted halts on commercial real estate evictions. The broader implication of COVID-19 is whether it falls under “force majeure”—French for “superior force.” In other words, an act of God.
Many leases contain force majeure clauses, even though that exact wording may not be used. While the COVID-19 pandemic may appear as a force majeure on the surface, not everyone holds that opinion, especially when it’s held up against more recognizable acts of nature, such as hurricanes, floods, and fires.
No doubt, this may prove to be one of the more lasting impacts on real estate from the pandemic: how will the non-payment of mortgages and leases and rents and the halting of penalties and evictions be unfurled, and who will ultimately foot the bill once they’re all due?
So what are the major takeaways from COVID-19’s impact on global real estate? Unfortunately, considering the fluidity of the pandemic, it's difficult to get a handle on what the long-term effects will be.
Real estate markets around the world should expect sharp drops in both activity and overall value for the near term. Expect some markets and sectors to come back faster and stronger than others. Pay attention to the areas that have "flattened the curve" first, as they are expected to be the first to attempt to make a return to normalcy.
Some of the central questions being asked when business begins ramping back up include:
Will the pandemic alter the way we work, live, and play? Will real estate prove less critical to economic success than in the past?
Will warehouses, logistics, and data centers transform into the new surefire investment spots? Can they support a real estate industry less reliant on traditional commercial spaces?
Will a continuation of historically low-interest rates and a wait-and-see approach result in a turn towards a hot buyers’ market for luxury housing? Will government assistance to buoy a broken economy have the desired effect of spurring business, or will tepid uncertainty rule the day?
Looking ahead, however, there is reason to be optimistic. Many areas bounced back from the 2008 financial crisis and went on a decade-long winning streak that was broken only by a global pandemic. So there is a precedent for recovery.
Ultimately, COVID-19 will result in a new normal for many sectors of the global economy. Rest assured that when life does return to normal, real estate will continue to play a central role in moving it forward—the same as it always has.