How Corona Pandemic (Covid-19) Affects Commercial Real Estate Market

Date Post: March 10, 2020

The Corona Virus (also known as Covid-19 or NCov), has majorly impacted stock market, the travel industry, and the entertainment industry. Stocks have plunged to their lowest, suffering the worst crash since 1987. The travel industry and entertainment industry have suffered greatly with the lockdowns and quarantines.

On the other hand, the impact has been limited on commercial real estate industry. It appears to be much less rattled. Investors are still actively investing.

Here are the key factors why commercial real estate will still thrive over long term-

Covid-19 impact is expected to be short term until the virus is contained
US Economy is strong enough to absorb short term negative impacts
Nature of commercial real estate investment is long term hold
Interest rates are all time low

In a recent report released by Marcus & Millichap titled “Coronavirus Outbreak: Implications for Real Estate”, they predict that most impacts will only be temporary until the virus is contained. Although the hotel, movie theatre, airline, and restaurant industry are impacted due to the lower number of tourists, the industrial real estate as a whole is not much affected.

An investment-grade Real Estate Investment Trust (REIT) office is not likely to experience drops in occupancy or rent receipts due to the long term lease. Their tenants will still pay rent. This is the advantage of commercial real estate investments.

Also, lower interest rates and commodity prices have traditionally been beneficial for real estate.

“If the coronavirus outbreak is relatively contained sometime in March, impacts on the U.S. and most commercial real estate sectors will be noticeable in the near term but less substantive over the year, with a net drag on U.S. GDP growth of between 5 and 15 basis points,” says Richard Barkham, global chief economist & head of Americas research, CBRE.

In 2003, the SARS epidemic caused a similar impact on the commercial real estate industry especially in the hotel industry. In the SARS epidemic, US tourist arrivals dropped from 400,000 in 2001 to less than 300,000 in 2003. By 2005, it went up to more than 400,000.

It is expected that just as SARs has caused temporary delays in economic activity followed by a rebound, a similar pattern can be seen during the recovery of the Covid-19 epidemic. There are two possible scenarios for recovery: a V-shaped recovery and a U-shaped recovery. In the V-shaped recovery, markets recover faster. In the U-shaped recovery, it takes a few months more time to recover.