Friday, March 13, 2020

What Does the Coronavirus Mean to Commercial Real Estate?

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According to Wikipedia - “Coronaviruses are a group of viruses that cause diseases in mammals and birds. In humans, coronaviruses cause respiratory tract infections that are typically mild, such as the common cold, though rarer forms such as SARS, MERS and COVID-19 can be lethal. Symptoms vary in other species: in chickens, they cause an upper respiratory tract disease, while in cows and pigs they cause diarrhea. There are no vaccines or antiviral drugs to prevent or treat human coronavirus infections.

OK, “so what?” you might ask. How will the potential COVID - 19 pandemic affect commercial real estate? Indulge me while I review a few ways.

Uncertainty. When the stock market gyrates wildly as it has for the past few days - some people get nervous. After all, trillions of dollars in paper wealth have evaporated. As folks glance at their diminishing 401 K balances - an air of uncertainty balloons. If resulting angst causes consumers to hit the pause button on spending - a ripple forms in the ocean of economic activity. When attendees avoid concerts, sporting events, movies or their favorite restaurants - businesses suffer a decline in sales. Operations who supply these enterprises - trucking, food, linens, security, novelties - then feel the pinch as the ripples become waves of lost opportunity. All of these rent or own commercial real estate. You get the idea.

Supply chain disruption. As mentioned last week - steel production is down 90% in China. Auto sales in Asia? Off a whopping 95%! One of the Port of LA’s largest exports is auto parts. Couple these factors with the typical container cancellations during the Chinese New Year and you create a lag in product delivery.

Travel. Hotels, airlines, rental cars, tickets to Disneyland, Knott’s or Universal - yep! Much of Orange county’s economic vitality is reliant upon tourism. Postponing travel equates to lost revenue for all who depend on customers to serve.

Interest rates. 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. Typically a safe harbor for this wad of cash is short term instruments such as Treasuries. As the demand for T-bills increases so does the price. Price increases cause returns to react inversely. According to CNBC - “The 10-year U.S. Treasury yield plunged to a fresh record low on Friday as investors dumped riskier assets and searched for safer options amid the coronavirus outbreak. The benchmark rate traded around 1.16%, marking the first time ever it traded below 1.2%. The 2-year rate slid to 0.95%, its lowest level since Nov. 2016. Yields move inversely to bond prices, which are rising as purchases surge. The 10-year yield has tumbled 25 basis points this week alone as the massive sell-off in stocks intensified.”

Well, at least surgical mask sales are on the rise.

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