Key Takeaways:

  • While the magnitude of COVID-19’s economic impact is still speculative, the directional impact is undoubtedly negative. Estimating the impact of COVID-19 on private commercial property markets is a two-part challenge that requires estimating the near-term impact from the virus and virus-related containment efforts, and then estimating the longer-term impact from any economic fallout that follows.
  • Supply chain disruptions, travel bans, and social distancing pose threats to owner-occupiers and tenants of commercial property. While a pause in dealmaking and potential temporary credit freeze pose a threat to financing and future dealflow. Recent declines in public valuations suggest that private valuations will also take a hit.
  • Over the next year, COVID-19 will lead to a 7% decline (19% in severe scenario) in the number of transactions and a 16% decline (32% in severe scenario) in total dollar volume transacted, when compared with 2019 numbers. The COVID-19 impact will push commercial property transaction activity back to levels not seen since 2015 for transaction count and 2012 for transaction volume. These estimates suggest that COVID-19 will cost the commercial property market 25 thousand transactions and $100 billion in deal volume.

What has happened?

Economic outlooks for 2020 were positive at the end of 2019, however, that has changed and economists now expect the first half of 2020 to mark the end of the longest economic expansion on record.

In late January, the World Health Organization (WHO) declared the novel coronavirus (COVID-19) a global health emergency. In February, as new cases of COVID-19 surged and the list of affected countries grew, the news reported drastic government reactions and global financial markets fell. In March, the WHO declared the outbreak a pandemic, central banks implemented crisis policies and programs, and markets continued to tumble.

While the magnitude of COVID-19’s economic impact is still speculative, the directional impact is undoubtedly negative. The severity of the impact is largely uncertain because the required length of and overall effectiveness of the initial response by governments, businesses, and consumers to contain the virus is unknown.

Initially, the economic impact was thought to be a supply shock driven by a temporary disruption in global supply chains. When COVID-19 made landfall in the US, the anticipated economic impact darkened, as expectations became concerned with both a supply shock and a demand shock driven by reduced consumer and business activity. Concerns have been raised over the potential longer-term implications the abrupt halt of business activity might have on local and national economies.

Estimating the impact of COVID-19 on private commercial property markets is a two-part challenge that requires estimating the near-term impact from the virus and virus-related containment efforts, and then estimating the longer-term impact from any economic fallout that follows.

Near-term impacts

The situation continues to develop and the economic environment remains fluid, but some trends are starting to emerge that will have implications for the commercial property markets.

Implied declines in 2020 commercial property transaction activity

Despite the difficulty of incorporating the unknown in their estimates and projections, analysts and economists have begun to reissue their forecasts adjusted for COVID-19. Wall Street has revised estimates of gross domestic product (GDP) for 2020 down from the 2% year-on-year growth to a range of -0.5% to -3.8% (average -1.4% full year). The revised estimates generally show a slight contraction (average -2% quarter-on-quarter) in the first quarter of 2020, and a more severe contraction in the second quarter (average -13% quarter-on-quarter).

Firm Q1 2020 (YOY) Q2 2020 (YOY) FY 2020 (YOY)
Goldman Sachs -6.0% -24.0% -3.8%
Credit Suisse -1.5% -12.0% -0.9%
UBS -2.1% -9.5% -0.9%
Barclays -0.5% -7.0% -0.6%
Bank of America 0.5% -12.0% -0.8%
JP Morgan -4.0% -14.0% -1.5%
Average -2.3% -13.1% -1.4%

 

Using the relationship between quarterly nominal GDP and two metrics of commercial property market activity (transaction count and transaction dollar volume), the impact to the commercial property market can be derived from these revised forecasts. Over the next year, COVID-19 will lead to a 7% decline (19% in severe scenario) in the number of transactions and a 16% decline (32% in severe scenario) in total dollar volume transacted, when compared with 2019 numbers.

Following a similar pattern as expected for GDP, the second quarter of the year is expected to be more negative than the first quarter. During the first half of 2020, the number of transactions in the first quarter is expected to fall by 13% year-on-year and then decline again in the second quarter another 20%. Total transaction volume for commercial property in the first half of 2020 is expected to fall by 20% year-on-year in the first quarter and then decline again in the second quarter by 25% year-on-year. These estimates suggest that COVID-19 will cost the commercial property market 25 thousand transactions and $100 billion in deal volume.

Looking at these declines another way, the COVID-19 impact will push commercial property transaction activity back to levels not seen since 2015 for transaction count and 2012 for transaction volume.

 

 

While these estimates are at the national level, the story will likely differ greatly at the local level. Metropolitan statistical areas (MSAs) with higher exposure to the travel industry (such as Hawaii, Las Vegas, and Orlando) will likely see more severe contractions in market activity. As well as those MSAs with stricter social distancing and containment policies (such as San Francisco and New York). Finally, MSAs with already weak or weakening economies would likely also see more severe declines in market activity in 2020 (for example, MSAs which have above average exposure to energy-production and were negatively impacted by the coincidental oil price shock).

Expect revisions

The drastic actions taken to date have been put in place with the intention of saving lives and containing the virus outbreak. However, these actions come at an economic cost. While neither the depth nor the duration of the crisis at hand is currently clear, the coordinated actions of governments, businesses, and consumers suggest that society as a whole is willing to pay these economic costs. However, as the situation evolves from day to day, one should expect to see revisions to initial estimates and changes in attitudes.