The rapid pace at which the coronavirus pandemic is spreading is having an unprecedented impact on the way humans live and do business.
While the coronavirus pandemic has adversely affected the economies in the world, varying opinions and facts are coming-up regarding the impact of COVID-19 on the real estate sector. The sectors of the real estate industry hit hardest so far are hotels, restaurants, bars, and other entertainment retail.
Let’s have a look at the positive and negative effects of COVID-19 on the real estate market.
1- A Large Drop in Sales
Covid-19 pandemic has badly affected real estate sales. Buyers are taking a wait-and-see approach before purchasing a house, resulting in a delay in deals.
As per a report by the National Association of Realtors, the four major regions of the US, Northeast, Midwest, South, and West, saw a decline in MOM and YOY sales in April, with the West experiencing the largest decrease in both the parameters.
NAR report shows that housing market activity in April fell 17.8% from March 2020, and the sales of existing homes in April 2020 dropped 17.2% from April 2019.
The economic lockdowns from mid-March through April in most parts of the US have temporarily disrupted home sales.
2- The Impact on Housing and Homebuilding
Homebuilders are not only facing a drop in demand from home buyers, but also a decline in the supply of materials. According to a survey by NAHB, 81% of respondents mentioned that the coronavirus harmed the traffic of prospective buyers. Another 54% reported issues getting the building materials they need to finish homes.
It is due to the steps taken by the government to reduce the spread of coronavirus, including social distancing efforts nationwide.
The influence of the stock market crash due to COVID-19 on consumer spending has worsened the situation. It has led people to spend less on discretionary items. For example, those planning to buy a home in an active adult community are shifting their plans, affecting the absorption rates at those developments.
3- Digital Revolution on Real Estate Industry
Social distancing and the lockdown have magnified the importance of digitization in the real estate industry. Real estate players have started investing in digital sales and leasing processes, including virtual open houses and showings, augmented, and virtual reality.
Targeted and personalized approaches taken by real estate players using digital technologies allow buyers to find the right space. They can offer virtual tours to the clients using photo-realistic renderings and even virtual reality experiences.
Interactive media benefits clients as well. During the lockdown, potential buyers who are unable to visit the location physically can view properties through virtual tours. They can get more information about a property without leaving their home.
4- Centralized Cash Management
The real estate industry is highly decentralized, indicating that crucial decisions impacting the cash flows are made at the property level.
However, with the onset of the pandemic, top authorities in the real estate market are providing more centralized directions to preserve cash. They guide credit lines, property-level cash flow decisions, and company-level balance sheet management.
The real estate players are expanding their bank networks and financing sources to secure additional lines of credit.
Actions Taken by the US Government and the Federal Reserve
The US government and the Federal Reserve have taken several measures in response to the impact of COVID-19 on the real estate industry.
The government is taking the following steps to combat the impact of coronavirus on the real estate market.
- The Federal Reserve provided short-term financing to investors to overcome the increasing selling pressure and illiquidity concerns in the agency commercial mortgage-backed securities market.
- The government passed the CARES act to increase the cash flows and liquidity in the market. The CARES act includes provisions related to tax and business spending that commercial real estate companies can leverage.
- The government has increased bonus depreciation and allowed companies to obtain cash refunds for the carryforward of minimum tax credits.
- The Federal Reserve has temporarily suspended reserve requirements to increase the ability of the banking system to lend.
- The government has provided the Paycheck Protection Program Liquidity Facility for commercial real estate. This facility allows lenders to make PPP loans to small businesses, and lenders, in turn, can sell those loans to the Federal Reserve at par. CRE can make use of it for mortgages, rents, and utilities.
Future of Real Estate Industry
The coronavirus has given a boost to the virtual real estate that will grow exponentially in the coming months and years. Real estate agents and companies will continue to improve their virtual skills and capabilities.
There are several websites as well that help realtors increase their earnings by providing them 100% commission.
The COVID-19 experience will also change habits that may affect demand for other real estates assets, such as hospitality properties and short-term leases.
Smart real estate players have taken decisions to protect the safety and health of all employees, tenants, and other end-users of space.
They are also thinking about how the real estate market will change permanently in the future, and how they can alter their strategy to earn profits. Those players that succeed in strengthening their position through this crisis will go beyond just adapting. They will take bold actions that will deepen relationships with their employees, investors, end-users, and other stakeholders.