Over the past several weeks, the stories about the coronavirus have dominated the news feeds. The concerns about the virus have become serious as it impacts the world economy in many ways. Since the great recession in 2008, the coronavirus health crisis has caused the worst drop in market value.
Inevitable, the outbreak has also impacted the real estate market in various ways. In the course of the virus ravaging the country, here are the possibilities we may see in the real estate markets:
- Drop in Real Estate Prices
Commercial real estate prices are expected to drop as foreign equity will have difficulty in accessing the U.S. markets. The outbreak will surely have a great impact in their ability to do business internationally. Compared to local investors, foreign entities look for much lower returns so they tend to offer higher prices for multifamily housing. The decline of the buying demand in multifamily properties in the U.S. market now can be attributed to the decline of foreign investments in this area of the real estate industry—this will in turn result in a drop of prices.
- Increase in Vacancy and Bad Debt
There is a great chance that the vacancy in the multifamily properties will increase especially in the areas where employment depends on nonessential jobs like entertainment—this will likely trigger a recession once the global supply chain is disrupted. Entertainment is a luxury and during a recession, people do not prioritize luxuries and focus more on their primary needs. But when this happens, employees working in the entertainment industry, considered to be nonessential workers, will lose their jobs.
Needless to say, those who will lose their jobs will be unable to pay for their rent, contributing to the growing number of vacancy rates. Other renters will be pushed to move out and look for more affordable apartments. While those who cannot afford to pay rent or move will contribute to a higher rate of bad debt. The property companies will then work with collection agencies to get those debts collected—this is a long and painful process that could lead to eviction of the renter.
Moreover, the increasing unemployment and more people being laid off from their jobs would mean there will be no new tenants qualified—or financially able—to replace those who get evicted, hence the higher vacancy rate.
If the vacancy rate is too high, it could result in the owners’ being unable to pay their mortgage loans. In extreme situations, this could lead into foreclosure if the loan is unpaid—this domino effect of serious problems can have a massive impact to the market as a whole.
- Increasing Demand to Invest Locally
If there is one positive effect during this current situation, that would be the possible increase in internal capital flow toward the real estate industry. Considering what’s happening, many investors will most likely pull their money out the stock market and put it into real estate—which based on the past, has proved to be more resilient and more stable than the stock market. Many local investors will be eyeing to invest in the multifamily real estate market which will counter the drop in demand and stabilize the prices—this will prevent a further decline in the value of properties.
What Can be Done?
If you are looking at some seemingly good multifamily property deals, make sure to take into consideration the possible rising of vacancy and bad debt—and if the deal still works regardless, then it is a good deal. You have to also consider being conservative in projecting your income—if a recession does happen, you may want to work with tenants for payment plans or give huge discounts to invite more renters in.
As the novel coronavirus became a worldwide pandemic, it has caused a significant impact to the global stock market and real estate market at the same time. Foreign investments will have difficulty to penetrate the market and real estate prices may drop because of that. Moreover, vacancy rates will rise and people losing work in non-essential jobs will lead to bad debts. In extreme situations, this can result in foreclosure of property if the owner is unable to pay his mortgage. But the good side is that many local investors will pull out their money from the stock market and put it on the real estate market which is the much stable one.
In this time of uncertainty, make sure that you weigh everything out and consider all the possibilities. Be careful in your decisions and talk to experts if necessary. If you have a property that you wish to sell, there are several “we buy houses Los Angeles” company who would buy your property fast. They offer cash which would be very helpful at this time. Just make sure to choose one that is reputable and would really meet your expectations if you need to sell your house fast, someone like Mrs. Property Solutions.