As the COVID-19 hits the real estate industry, things are going to be rough. The impact will vary from place to place and the magnitude of effects will depend on how long the economic shutdown will last.
The most impacted sectors of real estate will be the hotels, restaurants, bars and other entertainment businesses, especially the ones in tourist areas. Retail and housing—second-home and luxury homes—comes second.
As most of the workers are in a stay-at-home order while businesses are closed, and quarantines and curfews are in place, supplies needed by the builders and developers are becoming hard to come by. The large number of workforce layoffs lead to a decrease in consumer expenditures resulting to a downward trajectory of business activity. These and all other factors are pushing the economy into the border of recession.
Meanwhile, China has taken drastic measures resulting in swift stabilization of economic activity as factories and businesses have resumed. On the other hand, the United States is just starting to take steps slowly trying to cope up.
Effects will Vary from Place to Place
This blow to the economy will have different impacts from one place to another. Florida for one has multiple important businesses including Hotels, Theme Parks, Conference Centers, Casinos, Sports Venues, Restaurants and Bars, Cruise Ships and others.
The effects to the massive senior housing industry in Florida is yet to be seen.
There will be two ways the tourism industry will be affected:
- Direct impact from the virus contamination concerns.
- Indirect impact from lower stock value, decreased income, and people putting travel their least priority.
In Texas, the decline in oil prices will affect the oil producers and drag the economic activity down in some parts of the state. Also, social distancing and other government’s thrusts are taking a toll on hotels, sports venues, and restaurants and bars. Like in Harris County, Texas, bars and clubs are closed and restaurants are only allowed to do delivery, pick-up and drive-thru services.
Effects on Housing and Homebuilding
China supplies over 30% of the materials for home building thus the apparent impact to homebuilders aside from the fact that shoppers prefer to stay at home. In a recent survey conducted by the National Association of Home Builders, 81% said that the current crisis has caused unfavorable decline of home buyer prospects, and is most likely closer to 100% now due to lockdowns.
Builders are experiencing a sudden drop in their sales. It has also become difficult to avail non-conforming mortgage loans as lending conditions have tightened.
In the middle of all these, builders’ acquisition of land and development expenditures will slow.
Furthermore, the crash of the stock market will lead to drastic changes in consumers’ spending plans. Those who are retired or on to retirement and have been planning to buy a property have to reassess their decisions.
This will have a domino effect on nursing homes and retirement facilities as well.
Even the apartment rental businesses have to deal with their tenants losing income because of the lockdowns. Landlords may be lenient for the period of time which will in turn give them pressure losing income as well.
In spite of all these, the rental business still has a bright future as lease renewal rates before the pandemic were strong.
The single-family-built-for-rent business might be a better option with long-term benefits as work-from-home is becoming a trend.
Other Areas of Real Estate
The effects on retail development would not be favorable either. With restaurants and other stores closing, they will likely be asking their landlords for relief from their rents.
But once the virus crisis is done, its impact in the long run will be minor. Still, it will depend on the duration of the lockdowns.
In the office spaces, many will be empty for the meantime but once it is back to business as usual, it will have busy days again in this sector. However, the long-term will be affected if the work-from-home setup, to some degree, will persist.
As for the industrial and warehouse sector, the short-term impact from shipping interruptions may not be intimidating, but the long-term effect could be harsh. In the future, online shopping may be preferred by many and warehouse developments need to take place.
The Effects of Government Policies
In the efforts to fill the gap in the economy after the crisis, the government will surely take necessary steps. While the rules and policies are important, it should also be taken into consideration that the measures in place may not hinder the recovery. People from commercial real estate are concerned with present policies which may cause liquidity problems to occur. Even fiscal stimulus may take place after the crisis.
What Awaits in the Future of Real Estate?
This pandemic has affected both the demand and supply which is what makes this more troublesome.
The demand will come pouring in again once the outbreak is quickly resolved. The supply however may be more difficult to come in terms especially when the outbreak is not consistently contained globally which will result in not meeting the demand.
On a positive note, once the virus problem has passed, it will not be a cold start for the business. The economy will surely bounce back. People will start buying furniture, have some house jobs done, and start traveling again.
Taking China as an example where businesses have resumed, the “restart” could be quite quicker. Assuming that the social distancing will be successful in its goals, the U.S. could see a resurgence in economic growth in the last two quarters of this year.
However, based on a study done by the Imperial College in London, the virus may reoccur later this year and social distancing has to be done on and off.
“To avoid a rebound in transmission, these [social distancing] policies will need to be maintained until large stocks of vaccine are available to immunize the population – which could be 18 months or more.”
This clearly poses danger to a lot of industries including real estate. The time frame in which these problems are resolved will determine the duration and the ways real estate suffers.
If there is anything good that may come out of this, that is, there will always be those investors and developers with keen eyes who will make or find opportunities to acquire assets in depressed values and wait patiently for the perfect time to recover.