Real estate in the COVID-19 era: Situation serious, but not hopeless
When considering both the commercial and residential real estate markets within the economic chaos brought about the COVID-19 pandemic, two new surveys present a situation that is not lacking in bad news ”“ yet large pockets of optimism continue to remain amid the doom and gloom.
On the commercial side, real estate brokerage CBRE surveyed its capital markets professionals on March 17 to determine the changes it was witnessing from their clients. The poll found 50% of the company”™s capital markets team saw sellers delay bringing assets to market and more than 70% expected more of this disruption into the next 30 days. The survey found the size of bidding pools contracting, with 65% of respondents reporting they were getting smaller and 80% expecting them to shrink further.
The survey also found 50% of buyers trying to “re-price” deals that are under contract to a reduced figure while two-thirds of buyers asked for 5% price reductions.
Spencer Levy, CBRE”™s senior economic advisor and chairman of Americas research, addressed the issue of the equity real estate capital markets in a March 18 flash call, describing a “rapidly changing landscape” that saw disruptions during the early part of March, but which began to stabilize as the month progressed.
“Most deals … are proceeding,” he observed. “While institutional buyers from a capital balance sheet standpoint may be stronger, we”™re actually seeing a falloff in more institutional buyers than private buyers. And this is largely due to the denominator effect, which is squarely on the table, largely because of the falloff in REIT prices versus private market values.”
CBRE revised its forecast for the U.S. lodging industry”™s revenue per available room (RevPAR) from a mild pre-pandemic 0.1% decline to a dismal pandemic-era 37% crash for the year, with the second quarter potentially carrying a RevPAR plummet of more than 60%.
In the industrial sector, short-term leasing was expected to decline but longer-term industrial would benefit from more secure supply chains, continued strength in last mile and cold storage and increased activity in e-commerce from housebound workers.
CBRE also predicted that most industries were hitting a short-term “pause” button on office space and the energy and travel and leisure industries would feel the greatest impact on a market slowdown.
For multifamily developments, stress points could occur in senior housing and Class B and C apartment units for lower-income workers.
Richard Barkham, CBRE”™s global chief economist and head of Americas research, told the flash call audience that “a global recession is clearly already underway. In the U.S., we expect negative GDP growth of 1.5% in Q1, but a very large and painful minus-6 in Q2. Over the course of the year, we don”™t think the U.S. economy will lose ground ”” it will grow at around 0.4%.”
Barkham added that unemployment would rise from 3.5% to 5%, but stabilize. The impact of this uptick, he predicted, would have more of a short-term impact on real estate.
“Normally, we”™d expect that to push up real estate vacancy by around 150 basis points,” Barkham said. “But we think certain sectors at this stage are insulated from that, including industrial and logistics and multifamily. But we don”™t see this as to damage income rental levels in the longer term, perhaps over 24 to 36 months.”
On the residential side, a survey of U.S. agents by Juwai IQI, the Chinese-based real estate sales and media company, found respondents believing the remainder of 2020 will be dismal. In looking ahead to the next three quarters, 85% of U.S. real estate agents expected to earn less than the previous year, with 58% predicting a “significant” slashing of their earnings and 28% believing the reduction would be “moderate.”
Also, 34% of U.S. respondents reported a “significant drop” in foreign buyers as a result of the COVID-19 crisis, with 25% reporting a similar drop in local owner-occupier and investor buyers and 16% charting a decline in renter activity.
The survey also found 66% of U.S. real estate agents believed the current time is a “good” or “very good” time to buy a home, with approximately 8% arguing it was either a “bad” or “very bad” time for such a transaction. As for selling, 45% of respondents believed this is a “good”™ or “very good” time to sell, while 31% believed it is a “bad” or “very bad” time to sell.