The Coronavirus Could Have An Unintended Effect On Your Real Estate Portfolio
The Corona virus can unintentionally affect your real estate portfolio
I share insights on real estate investment and opportunity areas.
Traditionally, low interest rates and commodity prices have been beneficial for real estate
The global financial volatility associated with the coronavirus, known as SARS-CoV-2 that causes COVID-19, has shaken interest rates to their lowest levels: the 10-year Treasury is trading below 0.70% today. Arguably, lower interest rates are the most important indicator of higher real estate values, all things being equal.
But interest rates are not alone in their decline. During the last two weeks, there was a similar disturbance in the price of wood, which is widely used in housing production, as well as in the price of oil, which is a key component and cost consideration for the construction of commercial real estate.
The fall in interest rates combined with the successful cost of goods raises an important question: Can a very scary, modest and devastating illness cause an unexpected push into the real estate market?
Two major recovery scenarios and the role of central banks
There are two key Coronavirus virus scenarios worth checking out for real estate investors: V-shaped recovery and U-shaped recovery.
In a V-shaped recovery, life is back to normal, corporate travel restrictions ease, a vaccine or cure is discovered and those governments that close major schools and events around the world feel safe to start again.
In a U-shaped recovery, a level of consumer anxiety is met with evidence that the coronavirus is getting worse rather than better, or that the coronavirus has been discovered to be more transmissible than we currently know. In this scenario, it will take more than a few months until the coronavirus is no longer the most important factor in the global economy.
In both scenarios, the central bank and government response has been and will likely continue to be strong. It is worth noting that the fall in the US stock markets began in earnest on February 24, 2020. With very limited information about the coronavirus itself and not yet a full month of information on the direct impact of the coronavirus on the US economy, the Federal Open Market Committee lowered the interesting target of Federal funds at a rate of 1/2 point (fiscal stimulus) while the president signed a bipartisan emergency funding package of $8.3 billion (fiscal stimulus).
While all of this stimulus was put in place in just two weeks, the real measurable impact for consumers and the Fed is the drop in the stock market, not the surprise gain of 237,000 jobs for February with unemployment falling back to 3.5%. This is essential for investors of all types and especially for real estate owners. Monetary policy makers react to different data than they have traditionally relied on.
Based on the Fed's quick actions this week on the December and January language and the recent analysis in the Wall Street Journal indicating that further tapering could be on the way, it can be assumed that the global response from bankers and central governments will be coordinated, timed and timely until there is a better understanding of the coronavirus. .
When things eventually get better time has proven that the Fed is not moving quickly to reverse stimulus. It is unlikely that within two weeks of a substantial recovery in stocks related to future positive news surrounding the coronavirus that the Fed will raise rates by fifty or more basis points. It is worth noting that inflation was already below the targets of the US Fed, which usually supports rate cuts. In the end, adjusting back to the classes of two weeks ago is unlikely at any speed.
The timing of rapid rate reductions followed by slow rate hikes will create a certain period of time when the current interest rate regime is more beneficial to real estate investors than it was two weeks ago, especially in a V-shaped recovery.
The effect of Coronavir virus on corporate travel is critical in both V-shaped and U-shaped recovery
On February 28, 2020, my wife sent me the following text message, highlighting the economic realities of the Corona virus:
"Honey, I love you very much. I support you in everything you do and always will. I want to know if you can reconsider the conference in a few weeks, please."
The conference is not in a city, or even a country, where cases of the coronavirus have been reported. But considering my wife's wishes I decided to give up the trip. The conference, travel, accommodation and meals totaled $4,000 - $5,000.
Upon their cancellation, the conference directors stated that approximately 20% of those present would no longer travel due to corporate restrictions and/or personal precautions. The manager's post-cancellation email hinted at a creditable cancellation by stating “I'm working on vouchers for those who requested to cancel. It may take a few days to get them all working," and that's additional lost revenue for the conferences, transportation, and hosting.
In addition, Southwest Airlines, a domestic airline mainly in the US, cut its sales guidance by 200-300 million dollars due to a decrease in demand. In an interview with CNBC, the CEO of Southwest Airlines indicated that they do not yet know the mix of delay Travelers who have been business versus personal, but there is a belief that there may be a V-shaped recovery.
The two scenarios according to main property groups: residential may turn out better than the hotel; Office and retail to be involved
Apartments and single-family homes: Without a long-term impact on consumer confidence that substantially undermines people's willingness or ability to pay for their own housing, the value of residential real estate has increased significantly in the past two weeks as a result of lower interest rates and other inputs to housing values. Any temporary decline in shipments to homebuilders and homebuilders and their impact on rentals from a V-shaped recovery is likely to be small. In a U-shaped recovery, people are likely to find ways to house hunt more often, including working from home and avoiding activities that regularly take them out of the house. This may result in higher utilization of electricity and utilities , which is a negative for investors who retain these costs. In addition, increased time in the home will result in faster depreciation of building products such as faucets that could increase capital expenditures for residential real estate owners. In the most difficult scenarios, job and productivity losses cause lower demand and house and apartment prices.
Hotels: The travel bans hurt. The likelihood of a dollar recovery in lost revenue is low. Individual travelers can probably postpone their honeymoon or visiting friends, but a canceled conference is just lost cash flow to hotel operations. Interestingly though, in both a V-shaped and a U-shaped recovery, the virus may directly affect hotel supply. Breakthrough hotel projects may well have to wait as savvy hotel investors wait to see if the impact is short-lived or long-lasting. The reduction in supply in the V-shaped recovery, combined with a persistent low interest rate environment, could result in a medium-term positive impact on the hotel supply and demand balance. In a U-shaped recovery, hotels will face struggles. However, the hardest hit sector will likely be the Airbnb market. It can be argued that it is more difficult for the average traveler to feel confident in the cleanliness of one's home compared to the institutional cleanliness of a respectable hotel.
Retail and office: Retail will change. In a U-shaped recovery, there could be a faster adoption of e-commerce than what has already occurred in recent years. Additionally, in a V- or U-shaped economy, the biggest risk for a brand or chain is being associated with the coronavirus whether it is verified or not. Not only will it negatively affect the brand, but it will also affect the company's real estate owner regardless of e-commerce adoption. Because of the long-term lease for office properties, there is likely no negative impact on the office market in a V-shaped recovery. However, in a V-shaped recovery U, the negative scenario for office real estate owners will be related to job loss or a fundamental change in the approach of large corporations to the office environment.
The Bottom Line
The coronavirus will have an unintended constructive effect on what was already a strong real estate market if interest rates remain low and a return to normalcy is just months away. If it takes several quarters for consumer confidence, travel and job growth to recover residential real estate may do better than real estate. commercial, but it could be unattractive for both. Aggressive and coordinated fiscal and economic stimulus in the US and abroad will continue. The most important is the improvement in health outcomes, however, regardless of the timeline for recovery, it is likely that there will be a period when the stimulus still creates an effect that can benefit real estate investments.
The Coronavirus Could Have An Unintended Effect On Your Real Estate Portfolio
The coronavirus will have an unintended constructive impact on the real estate market if interest rates remain low and normalcy returns quickly. If consumer confidence stalls residential real estate is likely to fare better than commercial, but it could be unattractive for both.
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