The economic impact of Coronavirus is being felt all over the world in all industries. There’s an inevitable economic recession in the cards, and several industries are already beginning to indicate the signs. The United States is no different, and the U.S. commercial-backed securities market, in particular, is taking a battering. As a result, the value of hotels and other buildings acting as collateral for mortgages is going down by an average of 27%.
These falling values are a severe issue for portfolio managers who have moved into the commercial mortgage-backed securities market, searching for increased returns. The fall in the commercial real estate value is expected to go down even more before it eventually recovers.
How Does Commercial Real Estate Affect the Economy?
Commercial real estate, on average, contributes to 3-5 percent of the U.S. economic output. However, for showing the signs of a recession, the commercial real estate sector doesn’t serve as a great leading indicator. Commercial real estate reacts more slowly than the broader economy.
In the recession of 2008, the commercial real estate projects were already underway and didn’t showcase the recession’s effects until two years after the housing market crash.
Many analysts use the housing market as a proxy for the broader commercial real estate market. The housing market provides some sign of what investors can expect from the commercial real estate market. Interested parties can predict what will happen in the commercial real estate market by following the housing market’s ups and downs.
The Effects of Coronavirus
Commercial properties that are being affected by the Coronavirus are at potential risk of losing a quarter of their value. Hotels, in particular, have been hit the hardest due to the collapse in all forms of travel. One example out of thousands of similar situations across the country: The Crowne Plaza hotel in Houston fell 46% in value.
Other hotels are also reporting a massive decrease in their value, and the numbers across the board are grim. Banks themselves are raising provisions to cover any potential loss in real estate this year. The second quarter of the year saw a spike in the number of commercial real estate loans in U.S. bank portfolios flagged as problematic.
The longer the COVID-19 crisis goes on, the deeper commercial real estate properties will go into a valuation issue. Special servicers are taking new appraisals to assess how much time they should offer borrowers before starting foreclosure proceedings. According to analysts, it’s challenging to appraise a property in the current economic environment.
Another uptick in Coronavirus, stricter rules over travel, and the ability of people to go outside would significantly affect the potential sale value of commercial properties over the next few months. A volatile presidential election could also have a destabilizing impact on the value of the commercial property.
Commercial Real Estate in the Previous Financial Crisis
While the nature of this financial crisis is entirely different from previous ones due to its pandemic driven nature, there’s still much to learn from how the commercial real estate market behaved during the last financial crisis.
Commercial property bottomed out two to three years after the initial market crash of The Great Recession. During the height of the crisis, commercial developers were facing immense amounts in loan defaults and scrambled to find banks to help refinance. The losses on loans presented a significant amount of strain on small and large banks alike. The current recession has the potential to create a similar amount of strain on lenders, property owners, and tenants.
Conclusion
The impact of the Coronavirus pandemic is being felt in all facets of the economy. There’s no denying that we’re amid a major economic recession, and the pandemic-driven nature of the crisis is something we’ve never faced before.
However, with knowledge of how markets respond during the previous economic crisis, economists, lenders, and real estate professionals are better positioned than ever before to guide the commercial real estate market, and the broader economy, to safety. When travel restrictions and construction restrictions are fully removed, commercial real estate can begin on its path to recovery.
I like to spend my time giving back with organizations that focus on mentoring aspiring entrepreneurs. I have supported after school programs that focus on entrepreneurial and global initiatives in local primary schools. I recently extended my mentoring to include students at Case Western Reserve University.