The Economic Shock of COVID-19 and Its Impact on Commercial Real Estate Values

March 11, 2020

The COVID-19 outbreak is causing great turbulence in the global economy.  Stock markets around the world have plunged, the price of oil has crashed, and the 10-year U.S. T-bill is edging closer to zero.  Cancellations, curbed travel and supply chain disruptions are taking a toll on economic fundamentals, which will likely lead to a pronounced global downturn.  For CRE assets, the first impact will likely be felt in decreased liquidity as most market participants will wait on the sidelines for better clarity about the depth of the crisis.

In the coming weeks, we will pay close attention to what happens to transactions that are already in the pipeline.  Whether these transactions close and if terms are renegotiated, will be an important near-term bellwether. Properties likely to be the most impacted by the crisis include hotels, retail centers, and other assets where performance is immediately hurt by lower traffic and demand.  With constrained liquidity, underwriting is expected to tighten for properties that will require significant capital attention or those in markets that are feeling an outsized impact, like Houston where the drop in the price of oil translates directly to weaker demand for CRE assets. Supply chain disruptions also have the potential to hamper timing and costs for planned developments and assets currently under construction. Properties with bond-like income qualities, like stabilized apartments or industrial warehouses leased to credit tenants on a long-term basis, are the best poised to weather this period of uncertainty.

The potential economic outcomes of the COVID-19 situation range from just a temporary interruption to a deeper, more sustained crisis.  Whatever the case, our ability to gather and interpret relevant data points and deliver timely, accurate valuations is crucial to investors’ confidence in CRE as an asset class.