How the Coronavirus affects Commercial Real Estate

The coronavirus spread has created a disruption unlike any we’ve ever seen. The unprecedented shutdowns and interruptions to commercial business have created much uncertainty across many industries. For the commercial real estate (CRE) market, share prices of REITs have dropped, and it is clear business isn’t going to return to normalcy in the immediate future. What that means for the long term isn’t quite yet known.

At LCI Realty, we take pride in making sound investments, and we want to see others succeed in this time of global economic uncertainty as the number of cases of COVID-19 continues to rise. Here, we take a look at the current status of the CRE market and what factors might influence its future stability.

Current projections suggest dip in CRE market is a temporary situation

Marcus & Millichap’s March 2020 report highlights the U.S. economy is well-positioned to withstand disruptions caused by the coronavirus. At this time, the report suggests real estate supply and demand are currently balanced in general, and it’s anticipated the market will have a steady outlook. A recent CBRE Research report agrees, feeling many industries will suffer the fallout from COVID-19 in the short-term, but CRE will recover without a long-term impact.

Since real estate is a long-term investment, you’ll most often find it’s less volatile than other types of investments and is likely to withstand this crisis over time. Experts in the industry do acknowledge there are still some unknown factors that could create disruption. Containment is one of these factors. If the U.S. can successfully mitigate the coronavirus’ spread in the nation, this will have a favorable effect on the long-term for markets.

Potential problems associated with commercial real estate investments

On the other hand, if the current health crisis associated with COVID-19 is prolonged beyond a few months, this could cause additional disturbance in the CRE market, particularly in specific commercial real estate niches.

  • If government health authorities continue to mandate or recommend social distancing and/or order people to stay home for a longer length of time, this has the potential to cause a dramatic impact on the hospitality, retail and construction industries. This is especially true if Chinese tourism to the U.S. drops significantly for the long-term.
  • The hospitality and retail industries will feel the impact of canceled conferences, vacations, festivals and other events that include large gatherings of people.
  • Construction could be impacted if the supply chain from China for steel is disrupted for a long period of time. Additionally, we could see significant project and build delays for construction work not already given the green light.
  • In the consumer rental and office lease markets, landlords may have difficulty collecting rents from their commercial or household tenants as state or local governments force businesses to close or leasing business owners can’t afford to pay their bills.
  • Businesses that find they can succeed during the coronavirus crisis with having their employees work from home may see a remote work structure as a long-term solution, as opposed to a temporary one if they discover they can eliminate the costs associated with maintaining office space.

Ultimately, we’ll see whether what happens in China will have an impact on what could transpire in the United States’ commercial real estate market since it is largely dependent upon Chinese tourists coming to visit and the supply impact of construction supplies purchased from China.

Interest rate drops could increase commercial real estate movement

With the U.S. Federal Reserve recently slashing interest rates to near zero, this should theoretically support your ability, as an investor, to refinance existing debts and enable your ability to make acquisitions.

  • Commercial real estate may see increased activity during the next few months if the coronavirus crisis begins to pass. If you’re looking to put your cash into the CRE market, you may find it’ll bring you a strong ROI in light of the currently rock-bottom interest rate levels.
  • The Federal Reserve plans to be patient before lifting interest rates, stating it plans to wait to raise rates until it’s certain the economy can weather the COVID-19 crisis. As an investor, you may want to take advantage of this unique opportunity to invest in the commercial real estate market.
  • If not for the coronavirus health scare, commercial real estate would be largely in balance right now. As long as there is containment of the virus’ spread, along with a relatively timely recovery, we should once again see stability and growth in the CRE investment market once the crisis is over.

The COVID-19 spread has affected all of us on some level. If you’re looking for additional advice on business growth or how to protect yourself from the fallout of the coronavirus, LCI Realty can help. It’s our goal to provide you with the online resources you need to help you to plan, fund and grow your business.