Everyone knows that COVID-19 has shaken the real estate sector. Some markets experienced prominent growth, yet many others suffered remarkable losses. However, the virus itself has had a negligible effect when compared to state measures.
The truth is that most of the benefits and losses suffered by many industries come from government regulation. Strategies, such as lockdowns, remote work, and financial stimuli have been the main players behind the financial change.
Now, a new stimulus package is set to hit the US. It offers enormous relief for many individuals. But, does that mean the commercial real estate sector can benefit similarly?
The stimulus’ effects
McKinsey & Company has an excellent breakdown of how government measures affect commercial real estate. The most prominent hit to commercial real estate has been lockdowns and remote work measures. The need for office space has plummeted.
The “downfall” for office and retail real estate—including malls—is a major financial hit for the country’s economy. The industry is among the largest liquidity and employment sources around the world. Rent referrals and eviction moratoriums have provided bittersweet results for real estate, yet financial support has been vital for survival.
Luckily, the article does state that governments understand how important it is to keep tenants, landlords, and properties financially secure. Nevertheless, experts still debate whether this aid has been truly beneficial.
For instance, dozens of companies have been driven to hire help from third-parties. For instance, our financial services have been a fundamental advantage for many clients.
What do these programs entail?
Right now, most government financial aid is federal. That means allowing for more significant financing for direct support from federal funds. The best example is the stimulus checks for employers, allowing companies to relocate resources to critical costs.
The same is true for tenants and landlords, with these checks allowing renters to meet their dues. For instance, Canada allowed for 50% rent coverage loans for landlords, with tenants and landlords absorbing the remaining half. This program escalated for 65% on rent and mortgage interest for commercial space.
The UK has focused mainly on eviction moratoriums. However, France has provided excellent tax credits for landlords leasing to commercial tenants. Green building retrofits have also been fundamental in these stimuli.
Landlord and tenant uptakes
Uptake related to these programs varies depending on the country. Canada has offered 900 million CAD for commercial rent support. Unfortunately, the article mentions that solely 163 million CAD have been spent, benefitting only 21,000 businesses from the 1.2 million expectation.
The main reason seems to be the arduous application process for these programs. As a result, landlords prefer to avoid leveraging more debt—despite the loans being partly forgivable.
The UK has shown significantly more uptake, with £50,000 provided as loans for small businesses. The payment period is ten years for this “Bounce Back Loan” program. In this case, demand has exceeded expectations considerably.
What does it mean for metrics and asset value?
The article does mention that it’s still difficult to measure the real scope for governments’ market intervention. Currently, experts believe that landlord relief efforts aim to prevent market panic resulting in massive sales.
Additionally, sublease markets have experienced minimal demand, clashing with the abundant supply in the sector. Financial institutions have failed to remark asset values, and business closures are still prominent.
Regardless, the report does agree that the stimulus programs have cushioned the overall damage. Rent relief has been crucial for keeping asset values stable with income and occupancy continuity.
Market distortion
On the other hand, the article also agrees with our earlier statement: stimulus efforts have also increased other problems, like the construction market. Most projects didn’t stop during COVID-19, with temporary pauses being the common strategy.
Green retrofits have aided to stimulate the economy, yet they came with a cost. Construction costs have increased, bringing new risks to real estate. Similarly, eviction moratoriums have frozen several markets, as tenants tend not to pay rent—even when they can.
All of these measures result in market distortion. Assets aren’t being traded, and therefore, measuring their real value has been a noticeable challenge. Loan institutions have a harder time measuring risks as well.
The main problem is that the “stability” brought by government stimuli is temporary. There’s no way to assess how the market will react after government support ends. Therefore, proper forecasting is more difficult than ever.
What else should you keep in mind?
The last section of the article touches on considerable approaches for the future. In general, there seems to be more room for improvement regarding commercial real estate. Rent relief could be more effective, adding measures like direct tax credits for landlords.
Generally, tax relief has been among the ideal measures, as shown by governments implementing it.
However, landlords and tenants are critical for ensuring the industry survives this problem as unscathed as possible. The ideal way to reduce damage is to communicate effectively and agree on the best approach for both parties. Therefore, enabling straightforward communication channels is a worthwhile investment consideration.
Another country’s perspective
The Mumbai Mirror released a fascinating article last year on the same subject. The most prominent takeaways are how major relief efforts have benefitted the market. The government released two major efforts as soon as the pandemic hit.
The main focus for these announcements was the regulatory side, thanks to the force majeure represented by the pandemic. While the relief was a lifesaver for the sector, most experts agreed that there was still more to do.
A vital benefit for real estate
Infusing liquidity into the real estate sector has been imperative for curbing the general financial downturn. Allowing more time for completing real estate projects has been one of the highlights regarding the main advantages provided by the program.
The six-month extension for project completion has been fundamental for reducing development stress. Similarly, the liquidity efforts have also provided much-needed relief for the real estate sector.
Demand should remain a priority
However, not all experts agree that these efforts have sufficed. While liquidity and timeline extension benefits have provided substantial benefits, demand is still a problem. The general opinion was that announcements should also aim to boost demand for the real estate sector.
It’s important to note that the announced measures made it easier to complete construction projects. That means allowing for more market supply, and demand must meet this supply for stability. If supply increases without demand doing the same, a new range of problems will arise regarding asset value and market saturation.
Again, tax benefits were a recommendation for home loans. These types of measures are fundamental for encouraging demand growth, as purchasing and renting possibilities become more substantial.
What can we learn from this news?
Around the world, the forecast seems to be the same. Boosting liquidity without promoting demand is an incomplete benefit. Cash flow and supply increases are negligible when the risks outweigh the benefits.
Therefore, governments need to understand that the real estate sector benefits greatly from trading assets. If that isn’t possible, assessing property values after the stimuli stop becomes too uncertain. The withdrawal could negate most of the benefits currently provided.
The commercial real estate sector is changing rapidly
During the third quarter of 2020, The UCSB Current released a deep analysis of how COVID-19 and government response have changed commercial real estate. Interestingly, the pandemic has generated more data than economists had been used to.
The same holds for real estate. Plummeting markets could grow noticeably in months, and the opposite is true. One of the fundamental considerations is the COVID-19 vaccine.
What does the vaccine mean for business?
Most economists expect GDP to grow considerably with the vaccine’s availability. For perspective, the article mentions that COVID-19 could mean both the largest decline and increase in US history.
Commercial real estate has been among the hardest-hit industries for the pandemic. However, recovery has been slow but steady. The market is significantly more active, but most experts expect the recovery to take a while.
Can commercial real estate recover faster than expected?
However, the article also points out that government stimuli, along with the vaccine, have provided noticeable growth earlier than expected. The market is generally more active lately, and major players are expected to enter the market again.
Nevertheless, different sectors will need to adapt quickly to make sure they make the most out of this recovery. That means repurposing properties, like office space. However, this year shows some promise regarding recovery for commercial real estate.
It’s still a long road for some sectors
As mentioned, many sectors will need to transform and adapt if they want to benefit from the demand increase. Office space is one of the most prominent examples. Remote work will likely become the standard for multiple companies.
However, most experts seem to agree that it’s very difficult for office demand to disappear entirely. The article does mention how creating a working culture remotely is a challenge. The difference will be how different companies and property managers take advantage of the increased cash flow provided by the government’s relief programs.