How the Coronavirus is effecting the real estate market

It’s tough to make predictions, especially about the future - Yogi Berra

COVID-19 background

While this current outbreak is the first time many of us have ever heard of the coronavirus, coronaviruses were first identified in the 1960s, and are a large family of viruses commonly found in different animal species, including cattle, cats, and bats. The present pandemic of “coronavirus disease 2019” (aka “COVID-19”), originated in Wuhan, Hubei Province, China, and is linked to a seafood and live animal market, suggesting an animal-to-person spread. In weeks following the initial infection, a growing number of people were diagnosed with the virus who were not exposed to animal markets, indicating a person-to-person spread.

COVID-19 is now believed to spread similarly to other cold-causing viruses: through infected people coughing or sneezing, through contact with an infected person, or contact with a surface contaminated by an infected person. Reported illnesses associated with COVID-19 range from mild (cough, fever, shortness of breath) to severe (chronic respiratory sickness or even death).

At the time of this writing, the World Health Organization (WHO) has declared the coronavirus outbreak - with over 118,000 cases and more than 4,000 global deaths - a global pandemic. In the U.S. alone there are over 1,200 documented cases of infected people, with the death toll at 36.

COIVD-19’s impact on the the U.S. economy

While primarily a global health concern, COVID-19 has also had a dramatically negative impact on our economic system. In the past week Wall Street has officially ended its longest bull market run in history, with the Dow (INDU) futures down 455 points, the S&P plummeting more than 20% from its recent high, and the Nasdaq (COMP) futures dropping 2.1%. The New York Federal Reserve announced on Thursday, March 12 that it will pump more than $1 trillion into the markets in the coming days - an extraordinary step aimed at calming panicked investors.

COVID-19’s impact on the real estate market

In times of widespread health concerns and economic upheaval, the predominant atmosphere of fear leads many people to pull their funds out of investing and hold onto as much cash as they can. From an investing standpoint, this is the antithesis of sound financial acumen. In a letter to shareholders several years ago, Warren Buffet offered some prophetic foreshadowing of our current economic condition: "Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons…” The experienced investor will see the current chaos and panic as an opportunity to act on Buffet’s long time sage advice to, “Be greedy when others are fearful.”

But does this optimism hold true for real estate investing? Is there a present opportunity to capitalize on the economic downturn and profit through real estate investing? What are the short term and long term factors that investors should consider?

One such factor is that of “social distancing” in which people choose to forgo public gatherings in an effort to self isolate. Social distancing can be an impediment to face to face business dealings. But people can still do business via technology.

For us at LiveFree, we refuse to give credence to the widespread panic regarding the corona virus and its impact on the market. We will instead continue to encourage our investors to maintain a long term focus and realize that it’s best to buy the dip - not sell. The main impact that the market correction will have is that rates will likely continue to drop and hit all time lows (~2.4%). The stock market volatility will push capital into bonds and alternative assets like real estate. Both of these factors will force real estate prices up, not down. As a result, the best hedge against the market will likely be cash flowing assets.

Even as REITs go down, the value of the underlying assets is not diminished. Debt is cheaper, so it’s important to take advantage of these immediate opportunities with a buy and hold mentality. Asset prices aren’t appreciating, and the real estate market takes longer to respond to changes in price than does the public market. As such, we’re seeing the same price of assets as before, but with cheaper capital. As far as renegotiating is concerned, there’s no sense in trying to re-trade on deals with sophisticated investors, as their alternative is to hold and refinance their asset. With multifamily properties, from a management perspective, it’s important to have a contingency plan should any employees become infected with the virus. Ultimately, owning and purchasing cash flowing real estate ensures a more diverse investment portfolio, thereby helping to mitigate risk as the stock market fluctuates.

There is true upside here for the long term investor. It’s likely that we’ll see favorable loan terms well after this present crisis has subsided, as currently we’re locking in rates at 3.15% for retail properties. Now is the time to buy and hold for long term wealth building.

Final thoughts

As a people, our best response to COVID-19 is to do what’s in the best interest of our personal well being, and the well being of our fellow man. Take personal hygiene seriously, washing our hands more frequently, and avoiding physical contact with others (i.e. handshakes). As investors, we should trust in our institutions to combat and contain this virus, believe in the stock market to recover and increase in its time, and work our business plans to play through this cycle. By staying the course and focusing on cash flow and e-commerce resistant tenants, we will not only make it through this crisis, but will be the ones who prosper as the panicked watch from the sidelines.

1)  https://www.cdc.gov/coronavirus/2019-ncov/cases-in-us.html

2) https://www.cnn.com/2020/03/12/investing/stock-futures-bear-market/index.html 

3)  https://www.valuepenguin.com/average-commercial-real-estate-loan-rates