The Effect of Coronavirus on Commercial Real Estate
- By Acquisition Consultants
- April 17, 2020
The coronavirus pandemic has drastically changed the economy and created challenges and uncertainty for those in the commercial real estate industry and beyond. From heightened volatility in equity capital markets to altered lease agreements between landlords and tenants, the pandemic has created countless consequences in the realm of commercial real estate — the implications of which have yet to play out.
A Slowdown in Revenue
An emerging trend that is being seen across the real estate industry is a drastic reduction in revenue. Because most of the population is sheltering indoors and practicing social distancing, there is a decrease in overall economic activity. With no one allowed outside, businesses that rely on foot traffic are in danger of closing for good.
While food service businesses are attempting to keep the lights on by imploring safety measures of their own, such as rigorous sanitation and curb-side pick-up, many non-essential businesses are being forced to temporarily shutter — a devastating economic blow to many in the retail sector.
Tenants are not paying rent or at a minimum are arguing for partial rent. While the lease revenues plummet, the overhead for the property owner hasn’t materially changed if at all. This has forced almost every commercial asset into the “red” making it difficult to meet mortgage payments.
Landlord and Tenant Relationship
The coronavirus pandemic may also create rifts in the landlord and tenant relationship. It is imperative that landlords communicate key points to their tenants, such as how to implement health and safety measures, and keep them updated on how this pandemic could realistically impact their business in the long run. While some tenants can temporarily operate their business from home, others cannot. Rent will be impacted as retail store owners will have limited income to pay rent and other necessities during times of crisis. With no income coming in from tenants, lease modifications will need to be agreed to until after the crisis clears and the economic ripple effect slows.
Tracking Trend Statistics
When looking at the effects of coronavirus, tracking statistics can give an effective estimate as to how the industry is performing during these economically challenging times. Several facts can be ascertained by looking at public investment trusts: While the broad market itself has gone down to 28%, the investment trusts are down approximately 32%. However, we are also seeing positive effects with investment trusts. REIT performance remains steady and industrial properties are outperforming other categories. There are also noticeably drastic effects in equity capital markets. Over half of sellers have slowed their pace on introducing assets to the market and two-thirds of buyers have asked for a 5% price reduction. Such trends are likely to continue as the forthcoming recession unfolds.
A Boom in Foreign Buyers
One trend to keep top of mind is the temporary increase of foreign buyers. Certain foreign markets are gaining more confidence in their economies as the pandemic starts to subside in specific areas. This, in turn, causes an increase in the purchase of real estate in the United States.
Foreign investors had been moving their money into U.S. real estate because the United States had yet to experience the level of economic devastation seen in China. As coronavirus cases subside in the U.S and the curve hopefully begins to flatten, the influx of real estate traffic from abroad may begin to intensify.
How We Can Help
Although the effects of coronavirus may greatly impact your home or business, you can trust Acquisition Consultants to provide quality advice to help you with your investment properties in these times of need. As your representative, we will be on hand to offer our local market expertise and provide personalized solutions to help your investments weather this period of uncertainty. To help keep the stress out of this unique situation, contact Acquisition Consultants today.