Coronavirus is already disrupting commercial real estate activity

By Jeremy Larkin – Co-chairman, NAI Miami

Across the country, the coronavirus outbreak is beginning to affect real estate decision-making with the greatest impact to commercial property markets likely to be in development, finance, hotel, retail and industrial sectors.

We wonder, is this the Black Swan event that finally halts the nearly 11-year economic expansion in the U.S., and sends the commercial property market into a tailspin akin to what is currently happening with the global stock markets?

We sincerely hope not. However, the wheels seem to be put in place to potentially do so.

As the first week of March concluded, the Wall Street Journal’s lead story March 7-8 was “Virus Risks Darken Outlook for U.S., World Economies.” In the article, Grant Thornton Chief Economist Diane Swonk forecasts U.S. economic growth would cool to 0.5% annual pace in the first half this year, a marked slowdown from last year’s 2.3% expansion, with layoffs coming from restaurants, hotels and airlines (yet not enough of a slowdown to put the U.S. in recession, she said).

Events around the world, U.S. and Miami are being cancelled, daily. The biggest property event in Europe, MIPIM – in Cannes, France, was postponed to early June (it was scheduled for mid-March) and may be postponed again or cancelled. ICSC ReCon scheduled for mid-May is likely to be cancelled. Organizers for South by Southwest in Austin cancelled their gathering after Facebook and other tech firms announced they would not be sending their people to Texas. In Miami, Calle Ocho – a huge street party celebrating Cuban and Hispanic culture on S.W 8th Street in Little Havana was cancelled, as well as the Ultra Music Festival that was scheduled for Bayfront Park March 20-22.

The airline and cruise line industries are being hit hard by coronavirus. The trade group, International Air Transport Association, predicts the virus could wipe out $63 billion in worldwide airline revenues this year (in best-case scenario) and $113 billion in a worst-case scenario. United, Southwest and other airlines have parked over 1,000 planes as bookings have fizzled. Their stocks are down more than 10% since the epidemic struck. Princess Cruise Lines, a division of Carnival Cruises, has paused all cruises for 60 days. Their stock price has lost almost 80% of its value since its high in January 2018. AMC Entertainment Holdings Inc., the world’s largest cinema chain, has seen its stock fall nearly 70% since January as fears of the virus intensified.

In 2018, tourism contributed $18 billion to Miami’s economy, according to the Greater Miami Convention & Visitors Bureau. With tourism such a huge economic driver in our region, coronavirus is bound to negatively impact Miami’s economy.

Circling back to how coronavirus is beginning to impact the commercial real estate business, the clear sentiment from spending a few days in early March with more than 150 of my friends and owners of local NAI Global offices from around the U.S., Canada and Europe at NAI Global’s Leadership Summit in Houston, was COVID-19 is going to negatively impact second quarter leasing, sales and investment activity in the property sectors mentioned above, and could continue and accelerate the negative impacts going forward if the pandemic is not controlled soon. Here’s why.

Developers are in the risk business, based on defined and established risk parameters. To move forward with their projects, they need a relatively high degree of certainty and predictability the projects will succeed. While economic doubt is the enemy of commercial real estate development, it is generally predictable; uncertainty created by a pandemic is not. In Miami, existing projects underway will continue to move forward toward completion, but one developer advised us he is waiting until there is clearer understanding of the pandemic and its expected cycle combined with some assurances from our government the virus can be contained.
Almost all real estate projects are subject to the developer’s ability to attract capital and finance their projects. Lenders are highly risk averse and demand multiple clear, believable and predictable exit strategies to extend loans. Uncertainty tends to stomp the brakes on lending.
The hotel industry, with its business model of daily rental rates driven by algorithms based on predictable statistics, will be the most-affected by the pandemic creating a decline in tourism and business travel. Hotel projects on the drawing board will be stalled, perhaps never developed.
Retailers, shopping centers and mall owners, already on the ropes because of changing consumer preferences and buying habits i.e. e-commerce, face a new threat of shoppers staying home except for, or possibly including, basic needs. The number of store expansions by retail brands popular with consumers will slow down or stop until there is certainty.

The industrial real estate sector that has thrived during this economic expansion is likely to take a hit as global supply chains are disrupted. Manufactured goods from China and other places will be delayed in getting to U.S. ports for distribution by late spring or summer with a corresponding decline in traffic through the recently expanded Panama Canal. Those shipments typically fill our logistics facilities and warehouses; as well as bring needed construction supplies for our busy summer construction season.

Essentially my takeaways from talking with my friends and colleagues at NAI Global’s Leadership Summit was, “an uncertain mind, will not make a major decision,” or to paraphrase in an old business axiom: “I’d rather be pessimistic and wrong, than be optimistic and wrong.”

Where can we help you next? Give NAI Miami a call at 305-938-4000.

NAI Global is a leading global CRE brokerage firm. NAI has 375+ offices located throughout North America, LATAM, APAC and EMEA, with 6,000 professionals, managing 1.1 billion SF of property and facilities. Annually, NAI completes $20+ billion in CRE transactions. www.naiglobal.com

Jeremy Larkin is co-chairman and head of wealth management of NAI Miami; former chairman of NAI Florida; and former chairman of the NAI Global leadership board. 786-260-0401. jlarkin@naimiami.com

Originally published in the South Florida Business Journal