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Contact: The Center for RE Studies For:
Immediate Release
Three
Impending Scenarios for Real Estate
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.
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.
ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the
foremost authorities on real estate taxation and investing and has authored
books in these fields published by John Wiley & Sons of New York. He is the
Director of the Center for RE Studies, a real estate research organization and
President of calstatecompanies. To learn more about the Center, please visit
our web site at http://www.calstatecompanies.com
