The Coronavirus Pandemic and Real Estate – The Road Ahead
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The outbreak of the novel coronavirus, which causes COVID-19, has officially been declared a pandemic by World Health Organization (WHO). It has claimed over 18,000 lives worldwide, and there are nearly 300,000 confirmed, active cases as of March 25, 2020. In the USA alone, there have been 784 recorded deaths with over 50,000 confirmed cases .
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Economies worldwide are being clobbered by the coronavirus. Mass gatherings have been forbidden, flights have been cancelled, and entire countries including Italy, Spain, France, the UK, China, and India are under lockdown.
The situation is grave in the States too.
NCAA announced this week that March Madness shall be held without crowds. The South by Southwest SXWS cancelled its annual event, and Coachella has been postponed. Google has asked all its 100,000+ employees to work from home, as have other prominent organizations including Microsoft, Chevron, NTT, Hitachi, Verizon, Amazon, Facebook, HP, Intel, Twitter, and AT&T.
The real estate industry hasn’t escaped the wrath of corona, either. Take a look at some of the significant developments that have unfolded over the last two weeks:
- Ontario construction unions plead with the government to shut them down. (Global News)
- Is construction an ” essential industry” ? Yes and no, says AGC. (AGC)
- News investors eyeing second half bounce if coronavirus is contained. (Bisnow)
- All construction work ordered to shut down in Pennsylvania. (Philadelphia Inquirer)
- H alted or delayed projects for 28% of contractors. (AGC)
- Chicago’s more than decade-long construction boom is imperiled. ” We’re mentally preparing for a shutdown.” (Chicago Tribune)
- Developer of $400M UnCommons project expects virus disruptions. (Las Vegas Review-Journal)
- HMC Architects is “addressing in-person meetings and site visits on a case-by-case basis. ” (HMC Architects)
- Dahlin Group offers “generous sick policy for our employees, so they can take care of themselves and their families with confidence. ” (Dahlin Group)
- Ehrlich Yanai Rhee Chaney Architects announce “100% remote, limiting travel and in person meetings with a mandatory 2-week work from home policy. ” (EYRC)
- Boston mayor orders shut down of construction sites . (Boston Globe)
- Construction contracts could become a concern if the virus affects a jobsite. (Seattle Daily Journal of Commerce)
The blows of coronavirus to the real estate industry vary by market and sector. They are likely to be adversely affected by the duration of economic shutdown. The sectors that have been hit the hardest include hotels, restaurants, bars, second homes, and luxury properties.
Delivery of supplies needed by contractors, developers, and builders are already getting interrupted or delayed due to quarantines, business shutdowns, and curfews. The expected recession that will follow will result in massive layoffs, causing further contraction in consumer buying patterns.
Will the impact be the same everywhere?
Factories and businesses in China are re-starting after nearly 5 months. While this might inspire a ray of hope that things will bounce back to normalcy fairly rapidly, it must be remembered that China has taken swift and strict steps that the US has not. Its economic disruption hence varies across states, metros, and rural areas.
Let’s understand this with an example.
The markets in Texas are marred by the impact of both coronavirus and oil price collapse. Low oil prices are inducing an economic drag to oil-producing businesses, while social distancing and self-quarantine are taking a toll on hotels, restaurants, bars, and clubs.
In Florida, which contains several key industries like hospitality, theme parks, casinos, cruise liners, bars, restaurants, and networking zones, every single vertical that interacts with people directly is taking a hit.
Impact on the housing industry
Spring season is normally the busiest season for the real estate industry. After all, few homes look their best in the bleak grays of dirty winter. But would you rather practice social distancing or go home-buying when a contagious virus (with no vaccine so far) is circling the globe?
According to a study by Zillow on house-buying patterns during earlier pandemics, home sales have dropped significantly during the pandemic period without changed prices. It makes sense, since the prices rarely change should there be fewer transactions. It’s just the sales that have paused.
Furthermore, the federal government’s announcement of a moratorium on suspending foreclosures and evictions on mortgages backed by Fannie Mae, Freddie Mac, or Federal Housing Administration (FHA) for at least 60 days is going to last until April, and will keep the housing market from falling apart. Unlike in 2008.
Is the supply line getting interrupted too?
According F.W. Dodge and National Association of Home Builders, nearly 30% or one-third of total homebuilding materials are imported from China, not to mention finished products such as appliances, sinks, bathtubs, etc. If the factories and delivery networks are affected there, they can disrupt shipping and obstruct ongoing construction back in the country as well.
Another prediction by experts regards land acquisition and development. Because of economic insecurity, there can be a growing reduction in the demand of housing. However, some sectors might see a rise in demand. Let’s try to understand the impact of the COVID-19 outbreak on different verticals of real estate.
Even before COVID-19, office spaces were increasingly becoming compact and flexible. Many companies encouraged employees to work from home. In the current scenario, working from home is the only option most companies have, especially in places where entire countries are under lockdown.
Employers are looking at smaller office footprints in future, with the support of telecommuting service providers such as Slack and Zoom.
The need for co-working spaces will likely see a decline. As people practice social distancing more prominently, the allure of leasing a co-working space could diminish. Innovation would be the only chance to survive for such companies.
Housing and home building
While housing has not seen a steep decline yet, homebuilders are feeling the heat. Potential visitors have pulled back from open houses, and the material supply from China has also slowed down significantly.
Seattle, one of the world’s tech hubs, has seen a dramatic increase in home prices. However, the sale percentage dropped to a steep 27.6 percent year-over-year in January. Other cities aren’t better off. Supply is at an all-time low, while demand is incredibly high. This means that prices will continue to rise, despite sales dropping drastically. In the West Coast, the sales dropped lower in 2019 than the double-digit scores in 2018.
See for yourself: [Credits: Datawrapper]
This industry is preparing itself for handling tenants who are on the receiving end of layoffs and recession, or cannot make the rent for the current month. Landlords have the tough decision of choosing between offering a helping hand or maintaining a professional front.
By far, the retail industry has been the worst-hit sector.
Due to reduced footfall, restaurants and stores are struggling to generate anything above average revenues. This is a temporary setback; the retail stores will snap back as soon as the threat is over. In the current scenario, however, they’re bound to incur losses as long as social distancing and self-quarantine are in effect.
Industries and warehouses
The industrial sector is seeing both the good and bad side of the coronavirus outbreak. Presently, it is experiencing short-term impacts due to interruptions in shipping supply chains.
However, should online shopping become predominantly preferred, more industrial space would be required for housing inventory at distribution centres. Unfortunately, this also means that more employees would have to work within close proximity of each other, so they’ll have to be cognizant of how this impacts day-to-day operations.
So, what lies ahead?
The COVID-19 outbreak has brought forth an economic disruption that’s more problematic than the Great Recession of 2008, since it’s affecting both demand and supply.
On the demand side, the answer depends on how soon the outbreak is contained – meaning when a vaccine is prepared or when new cases flatten out. At that time, consumers will begin going out and spending again, and the economic engine will hum back to life.
The interruption on the supply side might take longer to restore, especially if the outbreak cannot be contained across the globe. This could lead to lags in fulfilling demands, which can cause negative consequences in turn.
On the bright side, once the virus is contained and immunity starts boosting up in the population, the kick-off will not be like the cold-start post the Great Recession. There might be a sharp drop in the real-estate buying and renting cycle currently, but we can also expect a strong upswing, hopefully during the second half of 2020.
At BluEntCAD, we’re confident that you are protected indoors. We believe that the real estate investors with a wiser vision will pick up assets at the opportune moment at lower financing costs – and when you do require a set of construction drawings and interior drafting for your new property, do get in touch. We’d be happy to lend a helping hand.
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