From SARS to Bird Flu to Ebola, it seems there is always some type of health scare that we are told will alter the course of our existence. But this one feels different. And it is already altering our lifestyle in dramatic ways that prior health scares did not. March Madness, Coachella and SXWS were either cancelled or postponed. Google and countless other companies encouraged their employees to work from home and toilet paper has become an unusually hot commodity. While there are currently no vaccines or antiviral drugs to prevent or treat human coronavirus infections, chances are that the world returns to normal.
While the real estate industry as a whole appears (at least so far) to not be affected to the same degree as the travel and entertainment industries, what impact can we expect the coronavirus to have on the real estate industry over the course of the next few months and years? Even if the coronavirus is gone tomorrow, the impact on the real estate industry could be significant.
Telecommuting has certainly gained momentum in the past few years. But in the face of coronavirus, employers now encouraging their employees to work from home during the outbreak. With this trend not likely togo away with the end of the pandemic, employers are getting an unexpected preview of what a significantly smaller office footprint could look like in the future. Technology companies that offer video conference and live chat features are becoming quite essential as businesses try to make a smooth transition for their employees working from home. If the technology companies can facilitate a work environment outside the office that delivers results for employers during this outbreak, then expect demand for smaller office footprints to accelerate as a result of the coronavirus.
Alternately, the trend toward co-working spaces could decline significantly as a result of the pandemic scare. As people try to avoid interacting with others in the office environment, the allure of leasing space in a co-working environment could diminish. The operators of co-working spaces will need to innovate in order to retain and attract new tenants.
With the coronavirus come recommendations about social distancing. Health experts suggest that avoiding crowded areas can be a helpful tool in avoiding the coronavirus, causing an immediate and significant impact on the retail sector as people avoid grocery stores, shopping centers and malls.
How long this will last is currently unknown. People still need food, clothes and other essentials. But they also want non-essentials.Amazon and other online services have become popular as people can now do their shopping from home. There will be a significant number of people who have never shopped online and will now turn to online shopping as a result of coronavirus fears. This could alter the future for some brick and mortar stores and how they accommodate the online consumer. As online shopping and curbside deliveries increase in popularity, retailers will need to consider store sizes, layouts, and pick-up points when they design stores.
Americans are also increasingly canceling or postponing travel plans as the virus spreads more widely across the country. Restaurants are also likely to be hit by a drop in patrons as more consumers are stocking up on groceries and having food delivered. America’s restaurant and food-service industry employs some 16 million trained and skilled employees, and the industry is a key economic driver in communities. The impact that COVID-19 will have on our workforce could be mind-blowing.
Much of Orange County’s economic vitality is reliant upon tourism. From Disneyland to Universal Studios, hotels, airlines and rental cars, much of Southern California’s economy is fueled by tourism. If people continue to delay travel plans, service-industry workers could be laid off. Hourly workers are the first to go. The hotel and hospitality sector will likely feel the effects of cancelled or postponed business meetings, conferences and personal trips for the first half of 2020.
The industrial sector will also feel the impact of the coronavirus outbreak, both good and bad. If online shopping becomes more popular as a result of the coronavirus, companies will be in search of industrial space to store inventory at distribution centers. However, larger industrial spaces likely will mean more employees in close proximity to each other, so employers will need to be cognizant of how this will impact their operations during future outbreaks of the next major virus.
Given the current efforts by the Chinese government to quarantine almost one half of its population and the negative impact that’s having on transportation and manufacturing activities in the country, we can safely conclude that the impact of Covid-19 on Chinese manufacturing is at least an order of magnitude larger than that of SARS. Some manufacturers have already had to throttle back production in their plants outside of China, and the list gets longer by the day.
The widening coronavirus epidemic is already affecting ports. The effect of the coronavirus is already visible as the number of departures from Chinese ports has decreased by 20% recently. The anticipated impact on U.S. ports is starting to be factored into financial analyses.
In addition to the potential risks faced by the retail, hospitality and industrial real estate sectors, the coronavirus could also increase costs and risks for all types of construction, particularly for projects that rely on materials or equipment shipped from China. Illnesses and quarantines could also disrupt the construction labor supply in areas affected by the virus, resulting in significant project delays. Rising construction costs and labor disruptions could be particularly painful for projects that are already operating on thin margins.
The coronavirus outbreak has led to a sharp decline in U.S. Treasury rates, which has driven down the interest rates on real estate loans. Many borrowers who were already in the process of refinancing existing loans will reap the benefits of these lower rates. If rates continue to stay low, more borrowers will rush to refinance and lock in rates that are at historically low levels.
If there is a bright side – it may be favorable interest rates – as commercial real estate financing becomes more affordable. Mass stock market sell offs generate a load of proceeds which must be invested. As the demand for T-bills increases, so does the price. Price increases cause returns to react inversely.
While the coronavirus may not seem like it will have a major impact on the real estate industry, a closer examination suggests that it actually may have a far-reaching impact. From office to retail to industrial, expect that the real estate industry could see major changes regardless of whether the coronavirus is short-lived or is here to stay.
No matter the type of property you own, you can count on the experts at Evanco Realty Advisors for the very best in full-service commercial administration. We provide everything you need to minimize your ownership workload and maximize the return on investment for each of your commercial properties. We provide peace of mind to owners, implement excellent property management services that enhance value for landlords.
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