U.S. Real Estate likely to remain a safe haven during Corona-virus scare

U.S. Real Estate likely to remain a safe haven during Corona-virus scare.

As we all know, the novel corona-virus COVID-19 is affecting all forms of investment throughout the world.

Yet, we’ve been through major financial and health related crises before and the property market has always recovered. Indeed, a report from Marcus & Millichap references recent history to estimate how long and how far reaching any current market correction might be.

Their conclusion: whilst it’s still too early to compare the full health impacts of COVID-19 with SARS or H1N1, property markets stabilized between three to six months on average following such events.

So, let’s take a more detailed look at how real estate investors might respond in the short term. Plus, over time, will more investors turn to U.S. real estate as a good place to invest their money?

As an international organization with representation in 10 countries Harcourts is able to review these effects and answer such questions from a global perspective:

Turbulent financial markets cause a flight of capital to real estate: in difficult times, traditionally, investors seek safe havens for their assets and cash. Low interest rates, modest inflation, a stable credit environment and high employment are key appealing factors for investors’ planning to invest in the U.S. property market.

Of late, the upturn in interest has been strongest for single-family residential rental properties, with investors worldwide flocking to the sector. Roofstock, a company that lists single-family rental houses for sale, says that it has seen traffic from Asia spike by 500% in recent weeks. Other significant increases in interest have been from Germany, the UK and Australia;

Mortgage borrowing rates have become lower than ever: The Federal Reserve recently announced it will lower interest rates to zero; the benchmark interest rate is now in a range of 0 to 0.25%, down from 1 to 1.25%.

Such moves are aimed at keeping financial markets stable and making borrowing costs as low as possible to stimulate spending (and the economy)—thereby affording home buyers an excellent opportunity to buy a new home or upgrade.

In addition to rate cuts, the Fed is restarting the crisis-era program of bond purchases known as “quantitative easing” whereby the central bank buys hundreds of billions of dollars in bonds to further push down rates and keep markets flowing. The Fed is also offering more-generous loans to banks around the country so they can give loans to small businesses and families in these difficult times;

Foreign demand remains strong and will likely increase: offshore interest in U.S. properties follows an established pattern. In times of crisis — economic, political or otherwise — investors from around the world usually turn to U.S. assets, which are perceived as more stable than in other countries.

The fact that the number of new coronavirus cases in China has been falling and that the outbreak is almost under control should help sustain demand from Chinese buyers, which make up the greatest proportion of foreign demand. Chinese investors rate U.S. housing highly for a number of reasons, one of which is the quality of the country’s healthcare system.

In fact, Georg Chmiel, Executive Chairman of Juwai IQI, the largest property portal in China, recently said “Property markets in countries such as Thailand, the U.S., the UK, Canada and Australia which have good healthcare systems and highly ranked abilities to react to viral outbreaks, are likely to benefit from an increase in buyer activity.”

Forecasts are still for economic growth in 2020: although forecasters are growing more pessimistic about the impact of the virus, most are still expecting economic growth—it will just be a much slower pace of growth than originally anticipated. For example, Goldman Sachs cut its forecast for growth to less than 1% for the first half of 2020;

If current economic forecasts of declines in GDP growth are realized, the effects of lower rates should help to offset the effects of a slower economy and increased economic uncertainty. It is likely that in California, for example, there will still be a modest improvement in both home sales and prices this year;

Prior to the virus, the US economy was on a sound footing: immediately prior to the virus intensifying, consumer confidence remained relatively high in February. The U.S. was on a solid footing economically, adding some 273,000 new jobs—the fastest pace of growth in a year and well above expectations.

What to make of all of this? Well, let me summarize our expectations:

In the short term, the novel corona virus will do little to reduce demand for housing, resulting in a continued favorable rental environment. The addition of new Class A units may push vacancy rates slightly higher during 2020, but minuscule Class B/C vacancy rates should result in rental growth for such properties.

The office sector is expected to perform over the next two to three quarters as it has done in the recent past. A tight labor market coupled with steady job creation are likely to keep office demand stable. Accordingly, there’s unlikely to be much change from the 13.0% national vacancy average rate from the end of 2019.

Marcus & Millichap mention that falling interest rates will encourage refinance and acquisition activity as quality investors have been able to lock in debt around 3%. Whilst corona-virus-related uncertainty has meant that property values aren’t escalating, this means that cap rates aren’t compressing, so investment activity should remain stable.

Similarly, there likely will be little short-term impact to the industrial sector. Some users may, however, postpone commitments for large warehouse space as they evaluate economic conditions, and this could delay absorption of new spec facilities in some markets.

Retail, on the other hand, may see a relatively poor performance in the short term. The demand for more experiential retail that has buoyed restaurants, entertainment venues, fitness centers and similar facilities may drop as the public is encouraged to avoid busy public spaces and, hence, curtail spending. Product shortages might also weaken the performance of some stores.

The corona virus is likely to have the greatest impact on the hospitality sector as tourists cancel vacations and corporations curtail employee travel. The cancellations of conferences and similar large events will hurt hotels’ bottom lines. Last year’s nationwide 66.2% occupancy rate was close to a record high but the sector may struggle to stay above the 30-year average occupancy of 62.5%.

The prognosis

These comments are based on market responses to pandemics over the recent past, and the current situation with COVID-19. In short, the Marcus & Millichap report expects reduced, but still positive, economic growth even in the face of these uncertain times, sustaining the cycle and, thus, the underlying demand for real estate.

Looking beyond the short-term, there are a variety of factors which offer support to real estate fundamentals and should lead to a relatively stable outlook for the property sector over the remainder of the year.

Thank you and stay safe,

Roy Osorio

949-241-6332

Stay up to date on the OC Housing Reports, Luxury Real Estate Auctions in Coastal Orange County, and learn from Real Estate Expert, Roy Osorio.

About the Author:

Roy Osorio

I am proud to be both a Realtor and a loan officer. After 28 years in mortgage banking, I know a little bit about financing the home of your dreams. I help families restructure their financial world so they can enjoy a better quality of life rather than working for the man and being a slave to their debts. I love to make these processes fun, educational and hassle-free!

As a Realtor for the last 10 years, I have helped families fulfill their dreams of owning a home with the white picket fence, kids, and dogs running around in the yard. Since coming to this country from Colombia in the early ’70s (yup..I remember the Brady Bunch, corduroy and 8 tracks), the American Dream of home ownership was a driving force for my single mom of 4 kids. She bought our first home in New York. She always had a dream of creating a safe, life-filled home for us. Her desire to make our home fun, warm and inviting was contagious to both our immediate family and friends that we shared fun times, playing in the backyard swing and trees (yes, the suburbs of Queens had trees!).

This dream was carried on by a young man heading west as a young marine. I headed to SoCal and landed in the beautiful beach community of San Clemente in 1982. After serving 6 years, my grandmother asked me to come back to New York. My response to her was that I could be a bum in SoCal and live better than going back to New York. I then bought my first home and brought them over here. Oh yes, I am still a surf bum. 🙂

I have owned several homes since then and have raised 4 beautiful children. From Huntington Beach Tower 20 to Old Mans in San O., and on some great CA days we have even made it up to Big Bear for some afternoon snowboarding sessions.

Needless to say, I have been blessed to enjoy my own version of “California Dreamin”. I enjoy nothing better than helping young couples start theirs, along with those folks who are going through their life journey in whatever phase of life they find themselves in, whether that’s up-sizing, empty nester, downsizing, or even finding that one-story home with a view for those sunset years.

Come experience life at its fullest even in the mundane world of finance and real estate!

And remember… Keep love always at the front of what you do.

Roy Osorio

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