The coronavirus is smothering the real estate industry, and the question as to when the pandemic will end is creating widespread uncertainty and concern. How hard the real estate sector has been damaged by the coronavirus will depend on how long it will continue to spread, and how long it will take for economic activity to recover.
The real estate sectors that are struggling the most are restaurants and bars, hotels and other businesses that deliver entertainment especially in areas that are marketed towards tourism. In second place comes residential and commercial real estate, because governmental measures aimed at stopping the spread of the coronavirus include lockdowns which restrict the free movement of consumers, meaning that the number of property viewings have rapidly declined since the Covid-19 virus broke out in Wuhan, China in January.
Materials and supplies required by construction companies and developers are becoming increasingly scarce as businesses introduce cuts to their workforce and operations in an effort to reduce costs and debts, and stay afloat during this coronavirus crisis. As more companies cut jobs, the unemployment rates rise putting immense pressure on an already embattled global economy, which dampens consumer spending and sentiment and increases the risk of a worldwide recession.
This week the capital of China’s Hubei province, Wuhan, emerged from its 76-day quarantine, resuming business operations. This has been construed by some as a beacon of hope for the rest of the world that economic activity and the real estate industry can recover from the coronavirus crisis quickly.
How has tourism been affected by the coronavirus?
Firstly, the fear of the unknown and the concern that it could spread rapidly is hampering tourism throughout the world. Secondly, the bearish behavior of the financial markets paired with high unemployment, fewer jobs, and sluggish economic activity, could have a domino effect on households as consumers carry less cash to spend on goods and services.
Retail businesses such as restaurants, cafeterias, and bars are feeling the brunt of the lockdown measures as nearly all citizens are confined to their homes to curb the spread of the virus.
How has housing and the construction industry been impacted by the coronavirus?
Construction companies have reported a massive drop in demand accompanied by a difficulty in acquiring the necessary building materials from China.
On April 6th the NAHB (National Association of Home Builders) published a survey entitled Week 2 Survey Shows Impact of Virus on the Rise outlining the impact of the coronavirus on the real estate construction industry.
‘The second week of NAHB’s online survey showed that several effects of the coronavirus on the residential construction industry have become more widespread and severe. Once again, traffic ranked as the most widespread problem, with 93% of respondents saying the coronavirus has had an adverse impact on traffic of prospective buyers.’
‘This result is based on 318 responses collected online between March 24 and March 30. As in week 1, the largest share of responses came from single-family home builders; and respondents were most often owner, president or CEO of their companies. The geographic distribution was somewhat different in week 2, however, with a greater share of responses coming from the Northeast and West Census regions.’
‘Five of these problems were also covered in week 1 of the survey. Four clearly worsened in week 2. For example, 80% of respondents said the virus has had an adverse impact on how long it takes to obtain a plan review for a single-family home — up from 57% a week earlier. Comparisons across weeks should be interpreted cautiously, primarily because of differences in the geographic distribution of responses. In this case, however, the percentage increased significantly in each of the four Census regions.’
To read the full article by the NAHB, click here.
Builders have also reported a decline in sales. In addition, there are escalating concerns regarding revised terms and conditions for lending and mortgages. Consumers with a debt-to-income ratio of more than 45 percent and the self-employed are now finding it harder to secure a mortgage.
Are the volatile stock markets a greater cause for concern?
Perhaps more cause for concern is the volatile state of the stock markets. As consumers start to feel the credit crunch, spending behaviors are forecast to take a sharp conservative turn. Prospective home buyers are likely to scrap their plans and wait for the coronavirus fog to clear before making a decision.
Landlords are now also bracing for a coronavirus aftermath with tenants stripped of their incomes. The rental real estate sector is expecting monthly rents to become a difficulty; therefore we could expect more leniency in terms of paying rent in the short-term until a cap is put on the Covid-19 pandemic.
Nevertheless, the renewal rate of lease contracts was up even before the coronavirus events unfolded, along with the number of residential real estate construction projects.
What about other areas of the real estate industry?
The short-term impacts on the retail sector are somewhat straightforward. Shops, bars and restaurants are likely to suffer profit losses and to make matters worse, the economy is readying for a wave of requests from tenants for some sort of leeway and exemptions to monthly rent payments. How much leeway landlords will be given is still unknown.
As for the long-term repercussions of the coronavirus, the waters are still very murky. The Covid-19 virus has triggered a lot of widespread uncertainty and fear. The global economy is suffering, and business and consumer sentiment is at an all time low. When and how fast the real estate industry will rebound from the current crisis depends on how quickly it can be contained.
The host of HGTV’s “Flip or Flop,” Tarek El Moussa said: “The homes aren’t selling, inventory is growing, and buyers are on the sideline. It’s a supply and demand. If you have more homes for sale and less demand is causes the prices to drop. It is absolutely a buyers’ market but the problem is you can’t get into a house to see them.”