What's the Latest with the Commercial Real Estate Market
April 2, 2020
Welcome to the second installment of the year of my "What's The Latest with the Commercial Real Estate Market" posts. You can check out the first post by clicking here.
To dive deeper into the state of the commercial real estate market and the economy here and abroad, keep on reading. (We have graphs!)
TL;DR - The coronavirus COVID-19 is having a major impact on our economy, especially in the hospitality industry.
Part I: Restaurant Patronage
One of the worst hit segments of the economy during the COVID-19 pandemic is the leisure and hospitality sector. If people aren't leaving their houses, they aren't spending money at movie theaters, sporting events, and restaurants. Below is a graph of the year-over-year percentage change in in-store restaurant diners in select U.S. cities:
As you can see from the graph above, once self-imposed social distancing and quarantining guidelines went into effect, restaurants saw a 10% year-over-year decline in patronage. After governments limited the total capacity at restaurants, we saw that number dip below 50%. As of March 17, those numbers were at 84% of where they were a year ago.
Restaurants with poor balance sheets and limited financials can't last too long on thin margins at these rates. Even multi-location concepts with stronger balance sheets are holding off opening new locations and making capital improvements on existing locations until things start to get back to normal.
Part II: Unemployment
In the financial recession of 2008 and 2009, the first people to get laid off from their jobs were those in the financial sectors. While layoffs of any kind aren't great, those in the financial sector typically have higher incomes, higher rates of savings, and better severance packages. During the early weeks of the coronavirus pandemic, the first people to get laid off are those in the leisure and hospitality sectors. These employees typically earn less than other industries and these workers don't have as much in savings compared to other industries. Below is a graph of the weekly unemployment claims for all workers across the US:
From the graph above, for the week ending March 20, you can start to see an uptick in number of claims filed from the previous three months. Then, for the week ending March 27, the most ever weekly unemployment claims were filed, surpassing the previous high by a multiple of five. Just how high these numbers go is yet to be determined, but the number of unemployed workers in America will continue to rise.
Part III: Real Estate Transactions
Even assuming that the coronavirus pandemic is short lived in the United States, say less than 8 weeks, there will still be a significant impact on the real estate industry - both residential and commercial markets. The chart below gives us a snapshot of what happened in China with regards to the number of real estate transactions during the COVID-19 outbreak:
The chart above shows the number of real estate transactions in China both before and after the Chinese Lunar New Year celebrations (typically the last week in January or the first week in February. This year's celebration coincided with the peak of the COVID-19 outbreak.) In 2020, the number of transactions were at their highest amount in the previous three years. After the New Year, transactions hovered around zero for two weeks and are still only at about 50% of the levels they were at this time last year.
The question over the next few months becomes: will transaction activity get back to where it was relative to the last few years? Will it stay low? Or, will it bounce back with significant gains?
Before the pandemic, businesses were mostly considered in good shape. Assuming the pandemic can be leveled off in a matter of weeks (versus months) the economy should rebound relatively quickly. But, if health concerns are not immediately addressed, this will have longer lasting effects on the economy.
Here's to the fundamentals.
Based in Downtown Tampa, Fla., Nico Hohman is an award-winning real estate broker, business growth and workforce housing advocate. Nico currently serves as the Director of Commercial Real Estate with Tomlin Commercial. Mr. Hohman was the Founder of Hohman Homes and HHRG, residential and commercial real brokerages based in Tampa Bay with over 30 employees. Nico is the Chairman of the Hillsborough County Historic Resources Board; a Director at Stellar MLS in Orlando, Fla.; and a former member of the Board of Directors at Greater Tampa Realtors. Schedule a time for Nico to speak to your brokerage, company, or association by connecting with him on LinkedIn.