COVID Impacts on the Real Estate Markets: the Good, the Bad, and the Ugly


 

Like most things, COVID has disrupted and obfuscated the real estate world. Our team has been closely tracking the pandemic’s impact on real estate markets and while the crises continues to be rapidly evolving, this article gives a rundown of what we know has already happened – and what the best information tells us may happen in the future.

 


The Housing Market

Mass unemployment has critically affected the nation’s housing market. The inability of apartment tenants and mortgage holds to make payments has been significant – but mitigated  by the expansion of federal unemployment benefits (now imminently set to expire at the time of writing). Consider that in early May, over 8% of all mortgages were in forbearance programs.1 In the rental market, one-out-five renters missed payments in May, excluding those living in affordable units.2

The crisis put the housing market on pause with both buyers and sellers leaving the market, leaving little housing inventory on the market. With the shift to remote working, many city-dwellers have started searching for homes in more rural lower populated areas. As a result, areas outside of major cities have seen homes moving quickly and above list price.3

Looking ahead, single-family construction is expected to plummet in the near term – dropping 27% from 2019 to 2020 with quick rebound expected in 2021. Home prices are expected to increase only modestly and well below the 5.2% seen in 2019.4 Multi-family housing is expected to also experience short-term drops in 2020 before gaining strength in 2021 and 2022, with a corresponding drop in rental rates this year before picking up next year.


The Commercial Office Market

Companies across the country have been adjusting to the shift in remote working. Former office spaces have been sitting vacant and idle. While many spaces are still in lease agreements, there have already been signs of increasing vacancy. In the first quarter of 2020 when impacts were just beginning to be felt, downtown vacancy rates increased by 30 basis points.5 By the end of March, more than half of office tenants had already asked for rent relief from their landlords.6

The outlook for the office market isn’t rosy. Vacancy is expected to continuing spiking to over 19% by the end of 2020, which would mark a historic high. Even under a favorable scenario, office vacancies would top over 20% in 2021 according to REIS. With the recent rapid escalation of COVID-19 cases, those projections may prove to be overly optimistic.

There has already been a shift from downtown offices towards suburban office spaces and expectations are that this is likely to continue with cheaper space allowing companies to implement better social distancing protocols thereby increasing the space per employee. The big question in the office market is whether there will be a drop in space usage intensity. One Gartner survey of CFOs found that 74% intend to shift some employees to remote work permanently. Alternately, some see the potential of current or future offices needing more or the same amount of space even if some of their workforce remains at home due to updated socially distanced work plans and spaces. The potential collapse of office demand is something to keep a close eye on and may require strategic repositioning of office property.


The Industrial Market

The market for industrial properties has been faring perhaps the best among real estate types with the acceleration in the shift to e-commerce providing a buffer against the crisis. Industrial had also already been very strong going into the crisis with high demand and vacancy rates at record lows.

With the crisis laying bare the critical importance of supply chains and logistics real estate, these types of industrial properties have seen increased demand. The pandemic has also accelerated existing trends related to e-commerce, including expansion of online grocery, omni-channel retailing (physical and digital), and the integration of technology into warehousing. As a result, distribution centers supporting large ecommerce users and last-mile facilities are well positioned. 

Perhaps the most significant impact on the industrial sector has been in food distribution and cold storage. By some estimates, an additional 75 million to 100 million square feet7 of freezer/cooler space will be needed for direct grocery delivery to homes and consumers buying online and picking up at the store.

Other potential future changes in the industrial market include the following:

  • Increased demand for manufacturing properties as domestic manufacturing increases as a result of re-shoring
  • Data centers are also likely to remain a strong sub-sector due to their importance, and ability to function without much on-site staff.
  • E-commerce, particularly grocery, will become more widely adopted
  • Companies may shift from “lean-inventory” approach to position more inventory around the country – generating demand for storage space.
  • Accelerated automation and robotization in the industrial sector

The Retail (and Restaurant) Market

As no surprise, the retail market has been hit particularly hard by the pandemic. Lenders are avoiding retail assets more than any other and retail delinquencies have spiked dramatically.8 Restaurants, as widely reported, have suffered tremendously and early estimates have suggested that anywhere from 10% to 40% of restaurants may close permanently.9

E-commerce sales were 40% higher for the last week of May compared to pre-COVID levels, with some particular categories up dramatically, including leisure and outdoor (139%), alcohol and cannabis (69%) and home goods and décor (46%).10 Even more dramatic has been increases in buying online and picking up at the store, which was up an astounding 248% during the last week of May compared to pre-COVID times.11 Additional consumer behavior shifts have been seen in the shedding of store and brand loyalty. Many are switching due to proximity, availability, ease of use, and safety considerations. Many are also trying store or generic brands for the first time.12

The future of retail is murky, but reasonable expectations include:

  • Continued declines in rents, occupancy levels, and total returns at least until 2022.
  • The shift to e-commerce will continue to accelerate and more a greater portion of retail space will be used for storage and fulfillment uses.
  • Retailers with the highest degree of touchless automation (and less in-person interaction) may have a competitive advantage for surviving/thriving. 
  • Increased focus on health and demand for fresh food could create new long-term consumer habits focused on healthy lifestyles and nutrition.

The Tourism and Lodging Market

The COVID crisis dealt the tourism industry a crushing blow. Demand for hotel rooms has evaporated and Cushman and Wakefield reported that from 5% to 15% of hotels may close permanently. Other industry analysis estimates that RevPAR (a measure of profitability) will fall 46% in 2020.13 State and local tax revenue from U.S. hotel operations is estimated to see a drop of $16.8 million in 2020 according to one report. With California, New York, and Florida anticipated to be hit the hardest according an Oxford Economics report.

Impacts to the hotel sector are anticipated to last from 2 to 5 years, but ultimately fully recover post-crisis. Trends already underway in the industry are expected to accelerate including smaller common areas and more touchless entries. Interactive spaces and shared experiences are being replaced by privacy, virtual, and distanced in design and marketing.


[1] https://www.marketwatch.com/story/over-4-million-americans-are-now-skipp...

[2] https://www.citylab.com/equity/2020/05/rent-payment-apartment-rental-cor...

[3] https://www.usatoday.com/story/money/2020/05/01/coronavirus-americans-fl...

[4] ULI Springs 2020 Real Estate Economic Forecast

[5] CBRE

[6] NAREIM

[7] https://www.cbre.us/research-and-reports/US-MarketFlash-COVID-19-Impact-...

[8] Moody’s Analytics – REIS. Q1 2020: Retail First Glance. April 2020.

[9] Appraisal Institute: Valuation of Impacts of COVID-19

[10] https://www.digitalcommerce360.com/article/coronavirus-impact-online-ret...

[11] https://www.digitalcommerce360.com/article/coronavirus-impact-online-ret...

[12] https://www.mckinsey.com/business-functions/m-and-a/our-insights/the-nex...

[13] https://www.hospitalitynet.org/opinion/4098197.html

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