COVID-19 Effects on Real Estate
There is no doubt that the recent COVID-19 crisis has put a damper on many different investments across the globe. The S&P 500 lost more than 30%, oil prices have plummeted due to lower demands, and the real estate markets have seen rapid declines. Since the pandemic began $36.5 million Americans have filed for unemployment benefits due to the numerous furloughs and layoffs that have resulted from the virus. An estimated 13.5% of the workforce filed for unemployment compensation in the past month alone (Tappe). To put this figure into perspective, 8.9 million people filed for unemployment from November 2007 to December 2009, a period known as the Great Recession. With all of these layoffs, many people are left with no choice but to decide whether they should eat or pay this month’s rent. When people are unable to work, this essentially ends up serving as a domino effect in the real estate market. When tenants don’t get their paychecks, they cannot pay rent; and when landlords don’t get their payments, it may lead to failure to pay mortgages which can effectively damage the entire economy as a whole. Whether one is a tenant, landlord, or business owner, major budget adjustments are required when they do not have stable and reliable cash flow.
Nearly one third of American renters (13.4 million people) were unable to pay April rent (Bahney). Many other homeowners were unable to pay mortgage payments due to the outbreak. In order to protect the people and avoid massive foreclosures and evictions, programs have been put in place by the government to protect living arrangements. As a part of Congress’ Coronavirus Aid, Relief, and Economic Security (CARES) Act, stimulus checks would be sent out to help aid the unemployed, but more importantly, the law gave a sixty-day security protection for foreclosures for homes with federally backed mortgage loans (Brey). This protection gives people time to gather their savings and develop plans to pay future payments. New York City was undoubtedly the hardest hit city in the world where many were forced out of work. Two out of three New Yorkers live in rental units, and 30% of these renters did not submit their April rent payments. Many initiatives have been put in place to assure that these people do not lose their housing. On March 20, Governor Andrew Cuomo enforced a 90-day freeze for residential and commercial tenants (Shaughnessy). The governor also put up a help website for anyone that may have a landlord threatening to evict them. In my opinion, as long as the landlords are receiving some sort of compensation to pay their mortgages, this is a good thing for the economy. The long-term effects of numerous people getting foreclosed or evicted could be detrimental to the overall state of the economy.
The restaurant business is taking potentially the biggest hit of all as a result of the pandemic. Restaurants in New York City typically pay 10% of their total revenues towards rent. This percentage has skyrocketed since the home lockdown began. The food and beverage sector accounted for 60% of the jobs lost in March. UBS believes that, as a result of this pandemic, one in five restaurants will be forced to close their doors (Hinchliffe). Restaurants are doing everything possible to make up revenues through delivery, even deeming March 24th as Great-American Take Out Day. Even once people are slowly admitted back into society, one can expect to see continued social distancing protocols taken to limit the amount of people that can be seated per restaurant. As a result of this unfortunate reality, many large restaurants whose main focus is to create a home atmosphere for the customers will soon be a thing of the past. This will result in an increasing amount of vacant real estate across the city, thus driving the prices down. On top of this, all the waiters and waitresses that once lived in the city will no longer be employed, which may drive down the price of residential units. As one can conclude, every financial decision that is made eventually can show its effects on the value of real estate.
New York City is seen by many as the commercial real estate capital of the world. CBRE came out with studies to show the recent effects the virus has had on commercial real estate capital markets. Barbara Armendariz, president and founder of SharpLine Commercial Partners, believes small businesses will “continue to operate remotely and save the physical office overhead” (Shaw). This can significantly decrease demand if these businesses continue to follow this trend. Buyers of commercial real estate have already begun asking for price reductions on initial prices, with over 60% of buyers asking for at least 5% rate reduction. These buyers are trying to take advantage of the opportunity and get extreme bargains from those that need the liquid cash. Another interesting statistic cited in the report was using 9/11 and the 2008 Financial Crisis as a comparison to today’s demand. The reports show that it took rent prices two years to go from their peak prices to their bottom prices and then another six years to get back to the peak. The values of the properties, however, were able to rebound much quicker (CBRE). If history repeats itself, it may be wise for commercial real estate buyers to nibble when making purchases, as there is a very real chance that prices will go down. The longer these home lockdowns continue, the better rates the buyers will receive.
The inability for tenants to pay their bills leaves landlords in a very unstable situation. The landlords need rent payments in order to pay monthly mortgage payments. In these desperate times, landlords may have no other option but to lower rent prices or sell their properties. With that said, the one positive that could be drawn from this is the potential investment opportunities it provides to those with excess cash to invest into real estate. So many property owners are in desperation mode, and sometimes that is when the best deals can be made. Real estate saw steady growth from 1940-2007 before the subprime mortgage crisis ushered in a period of decline. Since 2010, we’ve seen steady growth proving that investments in real estate are very safe barring world catastrophes. These investments may not give you maximum returns that the stock market can give, but its lack of volatility is extremely appealing to long-term investors.
The real estate market is truly dependent on numerous other economic factors. When the markets are doing well, real estate investors feel confident that they can make property investments because they have the liquid security to fall back on. With the unemployment rate up to 14.7%, the new regulations and stimulus that has been provided to Americans will help many pay their rent and mortgage payments. Still, there will be many left unable to make payments and it will be interesting to see how leadership decides to handle this crisis. COVID-19 is unlike anything we’ve ever seen in this generation, so it is essential that leaders avoid taking a cookie-cutter approach but rather make unique plans to help get the American people back on their feet.
Works Cited
Bahney, Anna. “New Data Shows More Americans Are Having Trouble Paying Their Rent.” CNN, Cable News Network, 11 Apr. 2020, www.cnn.com/2020/04/09/business/americans-rent-payment-trnd/index.html.
Brey, Jared. “What to Know About Housing and Rent During the COVID-19 Emergency.”, Next City, 21 Apr. 2020, https://nextcity.org/daily/entry/what-to-know-about-housing-and-rent-during-the-covid-19-emergency
CBRE. “CBRE Flash Call: COVID-19 Impact on Commercial Real Estate.” CBRE, www.cbre.com/research-and-reports/CBRE-Flash-Call-COVID-19-Impact-on-Commercial-Real-Estate.
Shaughnessy, Kristen. “Senator Calls on Cuomo to Suspend Rent Payments for 90 Days.” Spectrum News NY1, 21 Mar. 2020, www.ny1.com/nyc/all-boroughs/coronavirus-blog/2020/03/21/senator-calls-on-cuomo-to-suspend-rent-payments-for-90-days.
Shaw, Jeff. “Commercial Real Estate and Covid-19.” Elgin Area Chamber of Commerce, Elgin Development Group, 25 Mar. 2020, www.elginchamber.com/news/details/commercial-real-estate-and-covid-19.
Tappe, Anneken. “22 Million Americans Have Filed for Unemployment Benefits in the Last Four Weeks.” CNN, Cable News Network, 16 Apr. 2020, www.cnn.com/2020/04/16/economy/unemployment-benefits-coronavirus/index.html
