COVID and Real Estate

COVID-19 quickly grew into a global pandemic affecting the health of mankind, economies, capital markets and individual businesses.

Pri­or to the COVID-19 out­break, the S&P 500 Index had pro­duced an aver­age annu­al return of 9.8 per­cent over the last five years end­ing Jan­u­ary 31, 2020, and the Dow Jones Indus­tri­al Aver­age (the DOW) set its high­est clos­ing record on Feb­ru­ary 12, 2020.[1] Com­mer­cial real estate had a very favor­able out­look going into 2020, with CBRE pro­ject­ing “slow­ing but suf­fi­cient growth that will gen­er­al­ly sup­port strong prop­er­ty mar­ket fun­da­men­tals”.[2] While the first cas­es of COVID-19 were report­ed in the U.S. in late Jan­u­ary 2020, the num­ber of con­firmed cas­es sig­nif­i­cant­ly increased by mid-March. As the num­ber of con­firmed cas­es grew, U.S. cap­i­tal mar­kets expe­ri­enced dra­mat­ic changes, includ­ing record-set­ting point drops and the start of the first bear mar­ket in near­ly 11 years.

The com­mer­cial real estate (CRE) indus­try has been high­ly affect­ed by COVID-19, pri­mar­i­ly due to the unprece­dent­ed and nec­es­sary response includ­ing the tem­po­rary clo­sure of non-essen­tial busi­ness­es. As of April 7, 2020, forty-two states had ordered busi­ness­es to tem­porar­i­ly close and res­i­dents to stay home, result­ing in more than 316 mil­lion peo­ple work­ing and eat­ing at home.[3] This has had a sub­stan­tial impact on the Amer­i­can job mar­ket, with first-time claims for unem­ploy­ment ben­e­fits surg­ing more than 3,000 per­cent since March 21, 2020. The Depart­ment of Labor report­ed 10 mil­lion U.S. work­ers filed for unem­ploy­ment ben­e­fits in the last two weeks of March.[4] The pre­vi­ous record high of unem­ploy­ment fil­ings in a week was 695,000 in 1982. The Con­gres­sion­al Bud­get Office expects an unem­ploy­ment rate above 10 per­cent for the sec­ond quar­ter.[5]

This is neither an offer to sell nor a solicitation of an offer to buy any security, which can be made only by an offering memorandum or prospectus that has been filed or registered with appropriate state and federal regulatory agencies and sold only by broker dealers and registered investment advisors authorized to do so. An offering is made only by means of the offering memorandum or prospectus in order to understand fully all of the implications and risks of the offering of securities to which it relates. A copy of the applicable offering memorandum or prospectus must be made available to you in connection with any offering. Please see below for important disclosures.

On March 27, 2020, Con­gress passed a COVID-19 stim­u­lus bill, known as the CARES Act. This stim­u­lus was put in place to add $2.2 tril­lion direct­ly into the U.S. econ­o­my, includ­ing pro­vid­ing aid to all CRE sec­tors, most­ly in the form of liq­uid­i­ty sup­port for ten­ants. While the stim­u­lus pack­age may pro­vide relief to CRE ten­ants and own­ers, it does not extend, at this point, to CRE lenders, direct­ly affect­ing CRE cap­i­tal mar­kets.

The effects of COVID-19 are being felt across the globe in one way or anoth­er. The fun­da­ments of com­mer­cial real estate going into 2020 were strong and posi­tioned well for the short- to mid-term dis­rup­tion we are fac­ing today. While tem­po­rary, the length and ulti­mate mag­ni­tude of COVID-19’s effects are unfor­tu­nate­ly uncer­tain and mul­ti­ple aspects of the econ­o­my, includ­ing com­mer­cial real estate, are expect­ed to be neg­a­tive­ly affect­ed by the pan­dem­ic.

Sources:
[1] Bar­rons. The Dow Just Hit a Record High. It’s About Time. Feb­ru­ary 12, 2020.
[2] CBRE Research Real Estate Mar­ket Out­look 2020 U.S.
[3] New York Times. See Which States and Cities Have Told Res­i­dents to Stay at Home. April 7, 2020.
[4] CNN Busi­ness. A 3000% jump in job­less claims has dev­as­tat­ed the US job mar­ket. April 2, 2020.
[5] The New York Times. White House Debates How Far to Go on Face Mask Guide­lines. April 7, 2020.
[6] The Wall Street Jour­nal. The March Jobs Report in Charts. April 3, 2020.
[7] CBRE Flash Call: COVID-19 Impact on Com­mer­cial Real Estate. March 18, 2020.
[8] Wall Street Jour­nal. Ware­house Hir­ing Surge Defies Crash­ing U.S. Jobs Mar­ket. April 3, 2020.
[9] Yar­di Nation­al Mul­ti­fam­i­ly Report. March 2020.
[10] March 17, 2020 Gart­ner Sur­vey. Gart­ner HR Sur­vey Reveals 88% of Orga­ni­za­tions Have Encour­aged or Required Employ­ees to Work From Home Due to Coro­n­avirus.
[11] March 30, 2020 Gart­ner Sur­vey. Gart­ner CFO Sur­vey Reveals 74% Intend to Shift Some Employ­ees to Remote Work Per­ma­nent­ly.

Dis­clo­sure
The views expressed here­in are sub­ject to change based upon eco­nom­ic, real estate and oth­er mar­ket con­di­tions. These views should not be relied upon for invest­ment advice. Any for­ward-look­ing state­ments are based on infor­ma­tion cur­rent­ly avail­able to us and are sub­ject to a num­ber of known and unknown risks, uncer­tain­ties and fac­tors which may cause actu­al results, per­for­mance or achieve­ments to be mate­ri­al­ly dif­fer­ent from any future results, per­for­mance or achieve­ments expressed or implied by these for­ward-look­ing state­ments.

Impor­tant Risk Fac­tors to Con­sid­er

Invest­ments in real estate assets are sub­ject to vary­ing degrees of risk and are rel­a­tive­ly illiq­uid. Sev­er­al fac­tors may adverse­ly affect the finan­cial con­di­tion, oper­at­ing results and val­ue of real estate assets. These fac­tors include, but are not lim­it­ed to:

• changes in nation­al, region­al and local eco­nom­ic con­di­tions, such as infla­tion and inter­est rate fluc­tu­a­tions;
• local prop­er­ty sup­ply and demand con­di­tions;
• abil­i­ty to col­lect rent from ten­ants;
• vacan­cies or abil­i­ty to lease on favor­able terms;
• increas­es in oper­at­ing costs, includ­ing insur­ance pre­mi­ums, util­i­ties and real estate tax­es;
• fed­er­al, state or local laws and reg­u­la­tions;
• chang­ing mar­ket demo­graph­ics;
• eco­nom­ic risks asso­ci­at­ed with a fluc­tu­at­ing U.S. and world econ­o­my;
• changes in avail­abil­i­ty and costs of financ­ing; and
• acts of nature, such as hur­ri­canes, earth­quakes, tor­na­does or floods