Office buildings, sports arenas, casinos, hotels and conference centers (just to name a few) were all built to accommodate large numbers of people. Their valuations heavily rely on projected occupancies, with the ideal scenario being to reach maximum capacity to maximize revenue. Yet, this week and for an indefinite amount of weeks, many of these assets will sit empty, burning holes in owner's pockets, as they continue to experience the effects of a slowing US economy. As many Americans are urged to work from home and the government tightens restrictions on social gatherings, it is important to understand how “social-distancing” has, and will continue to affect the world’s largest asset class; Real Estate.
With so much uncertainty surrounding this pandemic, it is very difficult to determine the long term repercussions for the real estate industry. With that being said, the short term effects are less ambiguous and worth analyzing, to comprehend the depths of this complex predicament. The remainder of the article will focus on a few of the sectors that are directly affected.
To begin, the most obvious sector to feel the implications of travel bans and social gathering restrictions is the hotel and hospitality sector. With decreased travel, especially from international visitors, occupancy rates are expected to drop severely in major cities. While some cities are seeing the positive results of “stay-cations,” or in other words vacationing in your own city, others are being hit with the virus causing city-wide lock-down, allowing only essential businesses to remain open. Proximity to epicenters and the number of cases in the area will play a huge role in how occupancies will be affected in the short term. Ultimately, the cities that are affected the most will most likely require a longer time period to rebound.
The retail sector was already experiencing the effects of the global trend of e-commerce prior to the pandemic. But now to make matters worse, with lock-downs going into effect, there will be an almost certain disruption to brick-and-mortar stores. Supply chains are also becoming disrupted, so it will be very important for retailers to understand their cash flow and prioritize it in this time of slowdown. Less travel and fear of consumers could also prove detrimental to retail. Landlords may have to temporarily renegotiate terms of leases with retailers, as they are forced to restructure and adapt to the current market conditions. Online shopping should see an increase so the industrial sector may see some success as retailers continue to transition.
Lastly, the office sector is in a bit of a different situation. Most office leases are longer term and therefore won’t be as directly affected from shutdowns, at least from the landlord's perspective. However, from the tenant side, companies are transitioning to a temporary work from home phase, which results in the sunk cost of the rent for a company’s leased office space. Some landlords may consider renegotiating leases with companies to keep a long term relationship, but it is very dependent on the situation. Also, if leases are expiring soon, this might pose a threat to landlords, as demand could drop with the slowdown, especially if lock-downs continue to go into effect. Co-working spaces also face the threat of lack of demand, as their short term rental options will be disrupted by government restrictions and shutdowns.
Overall, global investment in real estate is expected to decrease temporarily, as lots of uncertainty is leading investors to be extremely cautious in their spending. This is not to say that there are not opportunities, but rather that investments will require more due diligence, which as a result could require more time before investing. Also, with major cities in the US such as Boston, putting all construction projects on hold, ground up development will be affected by having to renegotiate financing packages and delay their project timelines. Only time will tell what will happen to real estate values, but for the moment they are expected to decrease.
Ryan Horning
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With so much uncertainty surrounding this pandemic, it is very difficult to determine the long term repercussions for the real estate industry. With that being said, the short term effects are less ambiguous and worth analyzing, to comprehend the depths of this complex predicament. The remainder of the article will focus on a few of the sectors that are directly affected.
To begin, the most obvious sector to feel the implications of travel bans and social gathering restrictions is the hotel and hospitality sector. With decreased travel, especially from international visitors, occupancy rates are expected to drop severely in major cities. While some cities are seeing the positive results of “stay-cations,” or in other words vacationing in your own city, others are being hit with the virus causing city-wide lock-down, allowing only essential businesses to remain open. Proximity to epicenters and the number of cases in the area will play a huge role in how occupancies will be affected in the short term. Ultimately, the cities that are affected the most will most likely require a longer time period to rebound.
The retail sector was already experiencing the effects of the global trend of e-commerce prior to the pandemic. But now to make matters worse, with lock-downs going into effect, there will be an almost certain disruption to brick-and-mortar stores. Supply chains are also becoming disrupted, so it will be very important for retailers to understand their cash flow and prioritize it in this time of slowdown. Less travel and fear of consumers could also prove detrimental to retail. Landlords may have to temporarily renegotiate terms of leases with retailers, as they are forced to restructure and adapt to the current market conditions. Online shopping should see an increase so the industrial sector may see some success as retailers continue to transition.
Lastly, the office sector is in a bit of a different situation. Most office leases are longer term and therefore won’t be as directly affected from shutdowns, at least from the landlord's perspective. However, from the tenant side, companies are transitioning to a temporary work from home phase, which results in the sunk cost of the rent for a company’s leased office space. Some landlords may consider renegotiating leases with companies to keep a long term relationship, but it is very dependent on the situation. Also, if leases are expiring soon, this might pose a threat to landlords, as demand could drop with the slowdown, especially if lock-downs continue to go into effect. Co-working spaces also face the threat of lack of demand, as their short term rental options will be disrupted by government restrictions and shutdowns.
Overall, global investment in real estate is expected to decrease temporarily, as lots of uncertainty is leading investors to be extremely cautious in their spending. This is not to say that there are not opportunities, but rather that investments will require more due diligence, which as a result could require more time before investing. Also, with major cities in the US such as Boston, putting all construction projects on hold, ground up development will be affected by having to renegotiate financing packages and delay their project timelines. Only time will tell what will happen to real estate values, but for the moment they are expected to decrease.
Ryan Horning
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here.