If you’re a real estate investor or are simply interested in the real estate market, you may be wondering how the recent COVID-19 pandemic may have affected commercial real estate. As the pandemic has spread across the globe, so have fears of economic impacts and potential downturns. In the case of real estate, the effects are complex and many deals continue to close in spite of other industries taking a hit. To learn more about the potential effects of COVID on this typically strong sector, read on.
Debt Is More Evenly Distributed Than in the 2008-2009 Recession
In 2019, real estate debt was fairly evenly distributed among several types of lenders, including regional, national and international banks, government agencies, financial funds and more. As opposed to the 2008-2009 economic crisis, when commercial mortgage-backed securities had more than 50% of the market, today’s more even debt distribution means that one group going under won’t shatter overall stability and access to debt capital.
Lending Is Fairly Conservative Compared to 2008-2009
In comparison to the great recession of 2008-2009, lending has been fairly conservative during the coronavirus pandemic. This may perhaps be due to the fact that cap rates were low during the last recession, and future income growth projections tended to be on the optimistic side. However, there does seem to be a silver lining. Multifamily lending has remained strong so far in the pandemic. This may potentially be the case because that even when a home loan goes bad, a lender can still recoup up to 90% because of the high prices. On the other hand, with bad retail loans, for instance, lenders might only be able to get back about 70%.
Real Estate Prices Could Potentially Decline
Interest rates are currently very low, but interestingly, there has been little support for low cap rates, including from lenders who might normally be chasing down interest rates. This means that real estate prices could potentially start to decline. However, it remains unclear at the moment just how much of a decline this could be.
Like every sector, commercial real estate has been affected in several ways by the worldwide COVID-19 pandemic. With these facts, though, you can feel prepared before making any upcoming investment decisions. Be sure to assess potential deals thoroughly in this new economic landscape, and you could potentially close in on low interest rate deals with confidence.