Covid: Real estate market response.
Updated: Mar 30, 2020
The novel coronavirus that causes COVID-19 has upended many systems around the world, from stocks to tourism to the convention industry. With this uncertainty hanging over the market, how will real estate investors respond in the short term? What might occur on the broader horizon?
As quickly as the new coronavirus crossed China’s borders, the impact on the financial markets has been almost as swift. Fearing a bear market, investors directed their capital reserves to the relative safety of the bond market, resulting in the largest one-week stock market drop since the 2008 financial crisis. The Dow just had its biggest crash since 1987.
A special report from Marcus & Millichap points to recent history as an indicator for how long and how far reaching this market correction might be—as well as the implications for the CRE sector. SARS, H1N1 and other recent pandemics also generated short-term market volatility. While it’s still too early to compare the full health impacts of COVID-19 with those strains, the markets stabilized in the range of three to six months on average during past events.
In isolation from this new health scare, real estate supply and demand are largely in balance. It’s fair to assume that—barring a devolution into a far worse global health emergency—job creation and economic growth will both decelerate but remain positive. This should support real estate fundamentals and lead to a relatively stable outlook for the sector over the remainder of the year.
The biggest real estate impact from the coronavirus will be in the hospitality sector as tourists cancel vacations and corporations curtail employee travel. The cancelations of conferences and similar large events will also hurt hotels’ bottom lines. Last year’s nationwide 66.2 percent occupancy rate was close to a record high; while the virus will almost certainly diminish performance, the sector may still stay above the 30-year average occupancy of 62.5 percent.
Another asset class that could see poor performance in the short term is the already beleaguered retail sector. The trend for more experiential retail that has buoyed restaurants, entertainment venues, fitness centers and similar facilities may boomerang as the public avoids busy public spaces. Product shortages might also weaken store performance. Expect some retailers to hold off on expansion plans until activity levels bounce back.