Real Estate’s Industrial Sector Amid COVID-19

No matter where you turn to get your news, you’re likely to be bombarded by anything and everything related to COVID-19 right now. The full impact of this novel virus on our world has yet to be fully understood. In fact, you’ve probably heard the term “unchartered water” more than once — and this is probably the best way to describe today’s environment. 

Every industry, including commercial real estate, is wondering how this pandemic will impact their business, both in the immediate future and the long term. Unfortunately, the simple truth is that no one really knows yet. The best thing that we can do is learn from history, and look at how the world has responded to other crises: pandemics, economic crises, and more. 

While we haven’t seen a specific virus that has caused the type of worldwide shutdowns we are seeing now, we can look to history to anticipate the significant changes that we may likely see in commercial real estate. Read on to find out more. 

Economic Uncertainty

There has been so much economic uncertainty in the stock market over the past several weeks, making investors and others nervous. If you talk to anyone who works in finance, they will likely tell you that a big part of their day right now is talking clients down off of a ledge, trying to keep them from making panicked, rash decisions. When people get nervous about their finances, they hit the pause button on their spending, causing a ripple effect throughout multiple industries, including commercial real estate and the industrial sector. 

Think about it: when attendees stop going to concerts, sporting events, or restaurants, those businesses experience a decline in sales. But the decline doesn’t stop there and continues all the way down to the industrial spaces that house and ship the goods necessary for those businesses. 

Supply chain disruption

Entire industries worldwide have come to a screeching halt. Hotels, restaurants, construction companies, retail stores, and more have all shuttered their businesses — some for weeks, some for months. The ripple effect that these shutterings will have is hard to predict. Unfortunately, many businesses will likely fold as a result of the pandemic. And if these businesses occupied industrial space, that space will now sit vacant, likely causing a slow down in new construction coming to the market for the remainder of 2020 (and possibly beyond). 

Looking on the bright side

On a positive note, many experts predict that we will soon begin to see more favorable interest rates, making it more affordable to finance commercial real estate, including industrial space. And that’s not all — despite the gloomy outlook for many industries as a result of the pandemic, there are a number of reasons why commercial real estate investors should remain positive: 

  • Some investors in the stock market may soon be fleeing the market and seeking other investments, specifically real estate. And why wouldn’t they invest in commercial real estate? Given the lower risk and the anticipated returns, it seems like a no brainer. 
  • Treasury rates have hit historic, all-time lows. For those who have debt, such as a loan on a commercial property, they will benefit by refinancing their debt with substantially lower interest rates. 
  • If the demand for commercial real estate increases and interest rates remain low, it is not a stretch to expect that capitalization rates will continue to compress even more than they have now. In other words, even if an investor chooses not to refinance his property, the value of the real estate will still go up. 

To keep up with what’s happening in CRE, be sure to follow the CBC Worldwide blog

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