We at the Calstatecompanies Center for Real Estate Studies have been investigating the pandemic’s effect on the real estate market using three different scenarios that may potentially emerge.
Deploying different scenarios allowed us to investigate the impacts of the virus on real estate markets and the most consistent investment conclusions. We developed three scenarios to highlight the influence. Before looking at the specifics of each scenario, we started by laying out the common ground for all three scenarios followed by the description of a downside scenario, an upside scenario and our base scenario.
Currently, the full impact of the disease on the numbers of infections, mortality and recovered people is unknown. The measures necessary to contain the spreading of the virus are also uncertain. Assumptions about the intensity and the effectiveness of these measures are reflected in the outcomes of these scenarios.
Downside scenario In the downside scenario, the containment policies are not enough to halt the spread of the coronavirus. Our governments would be forced to extend current policies. These policy measures may prove to be insufficient and the real estate market may not recover.
Consequences Given this scenario, we would likely recommend a “sell” in our quarterly newsletter Market Cycles. The stronger USD, elevated uncertainty and continued disruptions would likely cause us to close our real estate investments. According to Green Advisors, shares of property-owning trusts, are down 42% from their peak Feb. 21 through March 23. Mall values? Off 61%. Hotels? Down 52%. Apartments? Down 43%. Compare that damage with a 33% drop in the broad market’s S& P 500 benchmark investments to zero.
Upside Scenario The rate of new contaminations would start to decelerate sooner and faster than expected causing our government to gradually relax containment policies, allowing GDP growth to normalize. Real estate would rebound from depressed level restoring demand. The size of fiscal policy measures would prove to be enough to offset income and earnings losses sooner than expected, initiating a recovery during the second half of 2020.
Consequences Given this scenario, we would likely recommend a “buy” in our quarterly newsletter Market Cycles. It may give breathing space for long-term benefits from a quick recovery. Inflation and wage pressures would likely be close to zero. With containment, the expectation of the final completion of the disease, real estate would be the preferred investment.
Base Scenario This scenario mainly outlines our basic thinking about the impact of the outbreak of coronavirus on the real estate market. First and most importantly, we expect the current situation to be temporary. This scenario may only slow the rising rate of infections. Our politicians, however, would be more reluctant to take additional restrictive measures and would likely only abandon the most restrictive measures. Real estate markets would recover slowly. However, a potential second wave of infections would force our government to immediately reintroduce restrictions which may remain in place for longer. In such a case, demand may only rebound gradually. As the restriction are not sufficient and timely, the real estate market will continue to struggle.
Consequences Given this scenario, we would likely recommend a “hold” in our quarterly newsletter Market Cycles. We would act more cautiously as demand may not be strong enough to revitalize growth. Given the uncertainty about the future development of the disease, real estate markets are not expected to rise to pre-crisis levels. With the gradual and slow return of the real estate market economy, it may be advisable to diversify your real estate investments in “pockets of opportunity” defined by calstatecompanies Center for Real Estate Studies.