Coronavirus Impact: Commercial Real Estate Is a Ticking Time-Bomb

Coronavirus Impact Commercial Real Estate

Why real estate is usually a good investment

One of the reasons it’s a good idea to invest in real estate is that it tends to have a low correlation rate with other forms of investment. If, for example, the stock market does poorly, it’s not necessarily the case that your real estate investment will also suffer. One example of when this is not true, however, is if you’ve invested heavily in a particular region’s real estate, that region relies primarily on a single industry for its economic well being, and that industry suffers.

It’s for this reason that regional diversification is often suggested to create a more resilient investment portfolio. Simply put, if you have properties in different parts of the world or country you’re less likely to be affected by regional issues and, as a result, will be able to weather the financial storm.

This is not the case, however, if the cause for the slowdown is global, as is the case with the ongoing Covid-19 pandemic.

The unique challenges presented by a global pandemic

Coronavirus presents a unique situation, particularly for commercial real estate, because entire nations are being forced to quarantine. In the United States, for example, city after city and state after state is being placed into shelter-in-place conditions, which means that people are being encouraged to avoid non-essential travel and not to gather in large groups.

Large shopping centers and malls are experiencing significantly fewer visitors, which is one of the risks of investing in commercial real estate in general: commercial real estate has greater exposure to the business cycle.

If there are a large scale economic upheaval and many businesses find themselves losing capital if not going bankrupt entirely, then commercial real estate stands to lose out significantly because occupants find themselves unable to pay.

Generally speaking, the risk of this occurring is low if only because it’s unlikely for many businesses to be unable to pay all at once as opposed to a few businesses being unable to pay at the same time. After all, commercial real estate often houses many different types of businesses, so if a particular sector begins to flounder, then the commercial property still has plenty of other occupants to make up for those losses (and vacancies are usually factored into budgets, so those losses are often already accounted for).

What to expect from a global pandemic

In the case of a global pandemic, businesses are being affected more or less across the board. This is more so an issue for commercial, retail, and office properties, however than for factories and data centers. The impact could be tremendous. While businesses tend to sign up for leases in increments of 4 to 5 years and there’s hope that those contracts will be honored, if operations are forced to cut back due to lacking funds then stocks and REITs will experience significant losses.

At the same time, corporations that invest in turning single-family homes into rental properties and REITs that invest in such companies are likely to increase in value. As reported by sources such as CityLab, from 2007 to 2014, America’s homeownership rate fell from 67% to 63%, which translates to around 1.5 million American households. That figure is only certain to increase as a result of Covid-19 thanks to increased unemployment and the fact that Baby Boomers being particularly vulnerable to the virus.

Previously, Baby Boomers were likely to sell off their properties to move into more affordable abodes, but there was also motivation to stay put for those who had paid off their mortgage and were simply comfortable where they were. The same may not be true now, especially if moving into more affordable housing may mean getting money for down on their luck relatives. And while fears of interacting with real estate agents and open houses may seem prohibitive, the rise of iBuyers, companies that use technology to make bigs on homes, may make selling an easier endeavor.

As for all the potentially vacant office space that’s left in the wake of Covid-19, it wouldn’t be surprising if some of those properties are themselves transformed into spaces for living as opposed to working. One thing seems more certain now, however: with so many people spending time online, data centers and REITS specializing in them are likely a good investment!

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