The COVID-19 pandemic has created an economic downturn that is unique in the experience of today’s business owners and government officials.
A nationwide survey of real estate professionals conducted by RealEstateBees.com shows the complexity of the issue in the U.S. real estate markets.
The survey was conducted in all 50 states and the District of Columbia. Professionals from various categories of real estate sales, investment, and services were included for a closeup view of the effects of COVID-19.
A Different Kind of Economic Cycle
Economic downturns that are caused solely by market activity are expected periodically. Prudent owners can plan for these times when their business is slow.
The unexpectedness of the pandemic, and the personal safety concerns caused by it, have presented a challenge no one has ever seen.
Survey respondents point out that the timing of the pandemic could not have been worse for their business. Residential real estate sales are strongest in the spring.
Across the country, sales in January and February were up from the previous year. As the level of danger became known, and precautions and restrictions were put in place, sales dropped steeply.
Survey comments relay concerns from homeowners about having people from outside walking through their homes. This was cited by brokerage owners and agents as being the primary cause of a drop in homes being listed for sale.
Sales agents also experienced unique expenses that were caused by COVID-19. Buyer’s agents have had to purchase Personal Protection Equipment (PPEs) for themselves and their clients. Listing agents have bought PPEs to place in the homes for sale for buyers who came unprepared.
Agents are also increasing their expenses for technology such as virtual tours.
It’s obvious that some firms and agents were clearly more prepared than others. Many said that if they had known that this was coming, they would have worked harder to maximize their business and to improve their technology.
The firms and agents who have held up the best through the pandemic were already doing those things.
New home sales were slowed as well. Sales staff were not allowed to open their model homes. Later, they were only allowed to have pre-scheduled appointments. No walk-in traffic.
Commercial investment properties brought weaker returns as retail businesses were closed. The value of office leases was put in doubt as office tenants had to send their workers home.
Perhaps forever.
Regional Differences in Economic Impact From COVID-19
Traditional regional differences and inconsistent COVID-19 policies by the states had a strong effect on their respective markets.
Some states said that the real estate profession is non-essential. Brokers were not allowed to leave their homes to conduct business. In other states, brokers were allowed to work outside the home.
Initially, most states would not allow actual showings. Potential buyers had to go through a virtual tour of the home. Home sales slowed as a result. The sooner that the state allowed in-person showings the quicker the market rebounded.
Brokerage owners reported that some states continued to confine showings to one per day per home after others had dropped similar orders.
The stronger markets in the south and west portions of the US reported that property values have held up well. Those surveyed in the northeast and midwest aren’t having the same experience.
Vacation and resort areas were shut down entirely. Investors who own those properties reported suffering significant losses. At what would have been the height of the rental season, that income stopped altogether.
On the other hand, places with a strong concentration of military bases have a regular supply of families moving in and out of the area. That was a strong factor in helping those markets to remain active.
Health and Safety
The comments heard most frequently in the survey had to do with personal safety concerns. Sales agents for all kinds of property were hesitant to expose themselves to the virus by going into both public and private places.
According to the National Association of Realtors, there was already a shortage of housing inventory before the coronavirus hit the US. This was made worse as homeowners decided to postpone listing their homes for sale for safety reasons.
When the pandemic response came in the spring, the housing inventory fell while spring buyers increased the demand. In some parts of the country, homes are selling in days for full price or more. This is keeping property values in those areas at a strong level.
Appraisers are having difficulty with the situation, both from the personal safety standpoint and in maintaining professional standards.
Some sellers are reported to be hesitant to let appraisers and inspectors into their homes. In some areas, appraisers have resorted to having homeowners fill out a form that describes the interior of their house. They have to use caution when placing a value on improvements that they haven’t seen for themselves.
Home inspectors’ reputations are built on the thoroughness of their work. Not being allowed into a seller’s home means that they cannot give an opinion on the majority of the working systems of the home including electrical, plumbing, HVAC, the roof, etc.
The RealEstateBees.com survey reported that in some cases, buyers had to decide whether or not to basically buy a property as-is.
Real Estate schools and trainers have been stopped by their states from holding in-person classes, which is a large part of their business.
Schools in most states were already allowed to give some continuing education classes online. Those states’ boards or commissions quickly moved to give schools permission to hold the remaining classes virtually using platforms such as Zoom.
Pre-Licensing classes for new agents were heavily affected. The students who were able to finish the required classes and take their state exams have had trouble finding testing sites that are open.
Trainers and coaches stated that their classes were not only affected by health issues but also because agents have had to cut costs. They believe that this has had the biggest negative impact on those new agents who need the most encouragement right now.
Professional photographers have also seen their business drop because of safety concerns.
And, the people who are hired to professionally stage a seller’s home for listing have seen their business “virtually” disappear. It’s hard for them to do their job without going into the home.
Commercial Real Estate Affected
Commercial real estate was also hit by the pandemic. Broker-developers and investors who were surveyed gave several reasons for this.
Retail businesses were closed completely. Leasing in new retail projects stopped and some leases already signed were terminated.
When government stimulus funds expire, many retail tenants are expected to have trouble making their rent payments. This has retail tenants, including important anchor tenants, seeking to renegotiate their lease terms. This makes investors hesitant to buy existing retail properties.
The fact that workers in all industries are being forced to work from home has caused a lot of uncertainty in the office property markets.
Major companies could come to the conclusion that they don’t need as much office space as before. Investors who were surveyed believe that this would cause a long term change in the need for that type of asset.
Medical office space has also been impacted by COVID-19. Elective surgeries and procedures have not been allowed which has impacted hospital and doctors’ cash flow tremendously.
One southeastern US medical system has estimated its loss so far to be $700 million. They withdrew from 5 medical office projects this spring.
Multi-family construction didn’t seem to slow down during this time. The opinion of the commercial brokers and investors in the survey was that most of those were projects that had already gotten their permits and funding before the pandemic.
With the uncertainty over the future viability of retail and office tenants, investors are cautious about buying existing commercial properties. The prevailing opinion of the commercial professionals in the survey was that values may very well come down in the next few years.
After several years of strong values and low cap rates, investors worry that they could wind up buying high and selling low.
Lenders have tightened their underwriting criteria on riskier loan categories, including many investment properties — shares Sam McGrath, Lead Commercial Real Estate Analyst from a national commercial real estate investing company PropertyCashin — this has made it difficult or impossible for some projects to go forward.
Private and hard money lenders who leverage their cash with borrowed funds had to restrict their own lending policies as well.
The restriction of capital is also seen in the area of national residential property investors. The number of iBuyers making offers on homes has dropped precipitously.
Technology
A consistent theme throughout the survey is the impact of technology. Regardless of the profession, those in the industry who were up to date on their technology systems and platforms have held up the best.
Investors who bought residential properties around the country were already used to viewing prospective investment properties virtually. Virtual showings are now the norm for homeowners as well.
Having to work from home hasn’t impacted real estate agents very much. Agents have always worked mostly out of the office, says one of the survey participants — Kristina Morales, a real estate agent licensed in the states of Ohio, California, and Texas.
Kristina continues: they typically would come to the office to print transaction documents and, once signed, deliver them back to the firm for storage. Now, most of these documents are signed and stored electronically, which reduces the unnecessary back-and forth with papers.
Today, agents mostly report to the office for staff meetings and training. Otherwise, they are out of the office more than they are there.
Brokerage firms need to regularly go over important policies and procedures of the firm in training sessions. Staff meetings also provide important market information and regulatory changes.
Brokerages who had not already done so are now spending time and money adding the technology to hold their office meetings virtually with their agents.
Appraisers in some states report that they are focused on adding the technology they need to do “desktop appraisals”. These are appraisals that are done without any inspection of the property.
All the information needed for a “desktop appraisal” is pulled from public records, the multiple listing service, Google Maps, etc. These are full appraisal reports, not limited reports like a Broker Price Opinion (BPO).
Opportunities
As with ordinary economic downturns, weaker agents and firms are being culled from the profession. This creates more listings and sales for brokerage firms and agents who were more productive and better prepared.
It’s likely that mortgage interest rates will remain low. Residential professionals were optimistic that this would continue and will help their markets to rebound.
Over 61% of brokerages and 52% of agents said that they were either maintaining or increasing their marketing. A lot of this is being done online and through social media.
Possibly as a result of so many industries doing the same thing, the cost of social media and online marketing is down. Many professionals are taking advantage of this to build their marketing platforms for the future.
Low interest rates are helping appraisers replace their lost residential sales business with refinancing appraisals. Networking with attorneys can bring them appraisal orders that are needed for litigation, bankruptcies, and estate planning. They can also recruit business from banks who need to analyze their loan portfolio.
Coaches and trainers are encouraging agents in their area to take advantage of whatever downtime they have for professional improvement training.
Schools are doing the same thing, expanding from required pre-licensing and post-licensing continuing education classes to professional improvement courses.
Regardless of the unusual nature of this economic cycle, one thing is the same. Cash is king. Investors with cash will be able to take advantage of distressed properties that will almost certainly start to appear.
The lack of participation by national iBuyers is giving an opening to local residential investors.
With the uncertainty surrounding some segments of the commercial market, residential investment properties could be a good hedge for the future.
By Taylor Wilman
Article by ForexTime
