As we predicted, the coronavirus sparked a meteoric drop in the stock market last week, including a more than 4,000-point plunge in the Dow. The question now is how much of that contagion will spill over to impact commercial real estate?
So far, CRE capital markets have been less reactionary than the stock market. Lenders have widened spreads to reflect the volatility and heightened risks, but capital is still flowing. For example, CMBS spreads have widened about 15-20 basis points at the AAA rated level in the past week and nearly 80 basis points on BBB-deals. Despite wider spreads, the collapse of the 10-year treasury yield to a new record low of 1.1 percent at the start of March means all-in lending rates are about the same as they were three weeks ago. Meanwhile, the Federal Reserve intervened with a rare emergency interest rate cut, dropping the benchmark U.S. interest rate by half a percentage point to 1.25 percent.
The most important variable for the economy and commercial real estate markets is the level of fear associated with the coronavirus and how people respond. The consumer is now about 70 percent of the economy in the U.S., so if people decide to stay home and stop traveling, going to hotels, movies, shopping malls, restaurants, events and the like, it is going to have a negative impact on the economy.
The biggest direct impact is being felt in the hotel sector and especially those hotel brands with international exposure. The impact on this industry could easily result in some debt defaults. The industrial and apartment sectors seem less vulnerable.
Past history has shown that market uncertainty tends to push investors to the sidelines. It is unclear how long that pullback may last as investors wait for more clarity and reevaluate investment strategies. The coronavirus could trigger more defensive investing strategies and an emphasis on needs-based real estate, such as housing and healthcare.
For now, interest rates are likely to remain near record lows with the possibility that the Federal Reserve could move to cut rates again to prop up the economy. The 10-year in the bond market is keeping interest rates incredibly low, so this could be a good time for owners and investors to take advantage of that by using debt and leverage.