There is no question that COVID-19 will have an indirect impact on commercial real estate around the world, but it’s the scope and magnitude of the damage that remains unknown, according to a newly released report by UBS Asset Management. In the report, UBS AM explores the wounds the coronavirus will likely leave on the global property market.
The effect of the deadly bug on CRE will be a mixed bag of sorts. “COVID-19 is an evolving scenario with varied economic impacts, depending on country, market, and sector,” Fergus Hicks, real estate strategist with UBS Asset Management and one of the report’s authors, wrote in a preface to the report. “It is impossible to say what the exact downgrade to GDP growth—and therefore real estate demand—will be. However, it is clear that occupier demand will be negatively affected, most significantly in retail, leisure and hotels, as movement is restricted, and consumer confidence dented.” The COVID-19 consequences for real estate will vary geographically, but no region will be spared bad news.
All eyes on Asia Pacific
Asia Pacific, with Wuhan, China, being ground zero for the virus, will be the first region to see the long-term damage. China leads the world in manufacturing output, so the pace of the re-routing of supply chains out of the country is expected to increase during the virus’s spread across the globe. As a result, low-end manufacturing will begin to leave China and commerce-centric logistics and high-end manufacturing facilities will take center stage.
The office sector will be altered as a result of the virus-induced rise in mobile working which, until now, had been in limited use in the APAC region. Companies won’t necessarily dispose of a great percentage of their office space, but they will begin to incorporate more shared workspaces and the accompanying lease-friendly terms into their office occupancy scheme. Hotel and retail investors, having learned from being burned by the SARS-induced fluctuations in property capital values and income, will show an even greater aversion to these tourist-dependent sectors.
According to the UBS AP report, recession is on the horizon in 2020 for most European countries, even if virus containment is achieved within the next couple of months. In a “contained virus scenario,” the already-challenged retail sector will underperform, as will the tourism-dependent hotel sector. While the office market benefits from limited construction activity, it will still undergo a subduing of rental growth. Industrial, a low-margin business in Europe, will fare the same as office, with a slowdown in rental growth. The multifamily sector will experience the least severe impact from the virus, as demographic mega-trends drive the market. However, a less favorable scenario, where unemployment goes on a notable upswing, would cause downward pressure on rental rates.
Upheaval in the US
The otherwise strong U.S. hotel sector will feel the burn of travel restrictions and retail will suffer amid mandated and voluntary virus-related closures such as the recently announced short-term shuttering of Simon’s 204 malls. The U.S. industrial sector will face the consequences of lower growth due to a slowdown in the demand for goods. However, the reduction of activity at retail destinations and restaurants will translate to an increase in e-commerce activity and home delivery of food, groceries and other goods. The office and multifamily sectors are in similar situations, as they both will experience drops in leasing as a result of the economic slowdown, as well as pessimistic consumers and businesses. But once the virus is contained and growth returns, both the office and multifamily sectors will likely go on the rebound.
With so many variables surrounding the coronavirus, only time will tell the direction the infected global CRE market will take. “There will be an impact on property performance, but its severity depends heavily on the duration and spread of the virus, which is very uncertain,” Hicks concluded.