Coronavirus and Its Impact On Real Estate

March 10, 2020

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I’ve had a few calls here at StageCoach Equity and Management in Houston from folks concerned about Coronavirus and its impact on the housing market. I won’t spend time going over personal safety choices that should be made regarding the disease as there are PLENTY of other articles doing that. First and foremost be safe and take the precautions you feel are best for you and family. What I will do is give an overview of what I think could happen in regards to real estate investing.

The No. 1 mistake I see investors making is executing investing decisions based on their own personal feelings of how the virus will impact them. Some of you are not worried at all and some of you are extremely worried. You are one person. The truth is that social sentiment should heavily outweigh any personal feelings when investing through a downturn or a crisis. As of now consumer confidence seems to be going down and societal nervousness is increasing. The virus is impacting behavior for society globally. 

As of today the US market is all over the place. As global governments signal intervention the market has gained back some confidence. In times like this I don’t sell. I am not an expert and thus follow Warren Buffett’s advice “Fearful when others are greedy and greedy when others are fearful.” I see downturns for myself personally as massive buying opportunities. I rarely actively sell (unless purchasing real estate). I’m not a market expert so I’ll leave my opinion here.

We know we are late in the debt cycle and a market correction is coming. There is always some trigger for this downturn. The triggering event is rarely fully responsible. Coronavirus could be the trigger that expedites the market correction. 

Unemployment has been at historic lows over the last several months. Even with a reduction of workforce unemployment would still be low. Even if unemployment rates moves up 3% we would be sitting at 6.5% unemployment which would be at similar numbers to 2014. For reference unemployment was at 10% after the recession in 2009. Monitor this number moving forward, but I wouldn’t be extremely worried about it at this time.

I would follow inflation numbers closely. If the government has to slow the printing of money (quantitative easing) and has exhausted government spending then we could see an upward movement in interest rates. While interest rates are at historical lows if the RE market moves down then it will be a great time to pick up discounted property with fantastic financing. Be ready to buy. 

Residential Real Estate

Here are a few behavior changes I could see:

55 and Up Most At Risk

Communities of 55 and up are an extremely popular investing vehicle to get into right now. I know of two folks personally entering this market and several more extremely interested. This is the one age group that seems to be at higher risk of death from the virus. If the death rate is around 2% my guess is in this age bracket is much higher. For that reason I believe there will be some nervousness around this investment class moving forward. There is also potential for loss of renters due to death. This is the biggest impacted RE asset class along with office space that I would be concerned about.

New Development Will Slow

If anything these type of scares encourage people to stay put. In any economic downturn or situation like this more and more people just stay put. Additionally, material costs should increase. China is responsible for a substantial portion of building materials supplied to the US. This will impact pricing. I expect we will see a reduction in new housing supply entering the market over the next 12 months. 

Also consider material delivery even if prices remain constant will slow as well. I’m already hearing rumblings around delivery times being pushed 2 weeks or more for some products. When housing slows down as long as the city is adding population rents will remain the same or even go up.

Single Family Home Prices Will Decrease Rental Demand Could Increase

As nervousness increases among potential home buyers they tend to wait on the sideline while the market settles itself out. This leads to great buying opportunities for investors. The great thing about housing is that people have to live somewhere and typically a reduction in housing buyer demand results in increased or stabilized rentals.

Renewals Will Go Up, New Tenants Unsure

Leasing renewals will increase during this time period. The old adage “better the devil you know then the devil you don’t,” applies here. As societal nervousness increases there will be less of a desire to make changes to family location, job, school, etc. All of these will contribute to increased renewals for existing tenant bases. 

I am unsure how this will impact new renters entering the market place. As potential homebuyers decide against buying and supply goes down we could see a rise in tenant demand.

Short Term Rentals Will Be Negatively Impacted

We had our first cancellation due to coronavirus. I’m sure markets in Seattle and other locations are even worse off. As events around the US get cancelled and travel advisories are in effect there will be less short term renters. We have a substantial amount of our properties around the Houston Medical Center which doesn’t seem to be slowing down. Vacationers and conference goers are definitely decreasing.

B&C Class Product Rent Won’t Change, Rent Growth Maybe Impacted

B and C product typically doesn’t see rents fall off a cliff. As A is impacted then B and C becomes more in demand as renters trickle down. Where I would be concerned is in suburbs or satellite markets where growth is necessary for investment return. Demand for our housing inside the loop in Houston has historically not been majorly impacted and I would believe that B&C products in the area will not be impacted.

Commercial Office Demand Will Decrease

The demand for office space will decrease as concern increases. Working from home will become more attractive for employees and employers. I am not an expert in this space so take this with a grain of salt. 

Houston Specific Thoughts

Oil Prices Dip

Oil prices are at all time lows as Saudi Arabia fights with Russia for production. When I first got out of college I worked in Oil and Gas Audit and then Oil and Gas Services. I was around for very high and very low oil prices during my period in that industry from 2004-2012. As oil prices decrease then upstream (drilling) and midstream (pipelines) are most impacted. Downstream (plants/manufacturing) tend to do well as their input is oil. As demand goes down oil and gas service companies tend to be hit hardest. The industry in general is very resource heavy and sidelining a large number of assets becomes problematic for many companies. Larger companies might cut a few headcount, but typically handle these price movements well.

In years past demand in other regions (eg. South America in early 2000s) would help mitigate some of this. As the virus fear is not localized to the US this would be less of an option. Keep in mind that oil and gas is responsible for about 7% of Houston’s economy. The leader in Houston is healthcare.

Ship Channel Could Be Impacted

The ship channel is one of the largest in the United States and responsible for a large amount of goods entering the country. As manufacturing slows globally and trade slows the ship channel could see a reduction in jobs and income. Many countries we import from and export too have seen a reduction in manufacturing and demand. 

Healthcare Will Do Well

Houston has the largest medical center in the entire United States and the medical industry is roughly 12% of Houston’s economy. The healthcare industry is poised to do exceptionally well during this time. More and more ER visits are occurring due to public concern. If the virus ends up spreading quickly then you would see full hospitals. 

As demand for healthcare increases then there will be demand for additional workers and staff to help handle the overflow. This means more jobs.

Local Investor Spending Could Decrease

I don’t have the data readily available, but many of my fellow business owners feel that a large number of high salaries are in the oil and gas sector. Higher net worth individuals typically buy a lot of the available assets. As folks become nervous  locally that could lead to a dip in prices. Which means a fantastic buying opportunity for investors.

Conclusion

This is a summary of my thoughts on the virus impact on real estate. Take what I say with a grain of salt. I’m not going all in on any of these opinions. The bottom line with real estate; always follow your buying fundamentals. If you buy right then you can weather the storms. Feel free to reach out to me personally with additional questions. I’ll consolidate them into another post! Visit stage coach management to get the latest as this progresses.

 

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