Top 3 Post-Pandemic Real Estate Transformations

July 24, 2020 • Author: Howard Taylor

In early July, Fitch Ratings published a special report identifying potential short-term and long-term effects of the Coronavirus pandemic on Structured Finance assets. The report is titled “The Next Phase: Coronavirus Accelerates Changes to the Structured Finance Landscape”. It outlines key transformations in commercial real estate based on 3 main catalysts: remote workers shifting real estate demand, reduced air and business travel, and cautious lending due to economic uncertainty.

Top 3 Post-Pandemic Real Estate Transformations

Fitch Ratings is one of the top three global credit rating agencies. They have offices in New York and London where they provide industry-leading insights that impact economies, businesses and communities worldwide.

Real Estate Demand

By this point in quarantine, it is pretty clear that the pandemic has had serious impacts on our normal way of life. The post-pandemic norm will include big changes to how we live and work. A significant number of workers experienced the transition into telework during lockdowns - to the great benefit of many employers’ bottom line. A separate report from Citigroup (Oxford Martin) says 24% of occupations employing 52%of the US workforce can be done remotely. Many office roles will shift to permanent remote work. In turn, workers will search for larger residences to fit a home office space. Being stuck at home during lockdowns will also result in a bigger demand for larger outdoor living space, which is found primarily in suburban and rural areas.

Because so many workers will shed ties to big city centers, housing demand will shift to suburban and rural areas. Where the people go, businesses will follow. Angela Morris of ALM says in her assessment of the report that “service and leisure companies may follow the population exodus into small cities”. So in addition to a shift in the residential real estate market, we will likely also see commercial real estate opportunities beyond the big city. This is great news for investors with properties in previously declining areas, as those could be revitalized amidst this shift. These trends will be reflected in both RMBS and CMBS.

Top 3 Post-Pandemic Real Estate Transformations

Reduced Air and Business Travel

Business travel may be permanently reduced, considering that virtual meetings have become the status quo as of late, to avoid infection and to cut costs. Event venues and convention centers may continue to see reduced demand as large-scale events are discouraged by local authorities. Airlines and hotels will see decreased demand if business travel declines permanently. As many travelers opt out of flying and ride-sharing, “the recreational vehicle market has experienced a significant boost”. This trend in personal mobility will likely continue to increase demand on personal vehicles as people move further away from big cities.

The report says that empty office and multi-family residential buildings may end up meeting rental housing needs, and bringing down housing pricing pressure in big cities. But this may differ for student apartment complexes in the short-term as most university classes are remotely instructed. Plus, there are fewer overseas students due to slowed international travel. 

Cautious Consumers and Lenders

Most of us will not come out of the pandemic unscathed. Consumers who entered this new era with financial difficulties will be much worse off afterward, and discretionary spending will decline. There will be less disposable income as families choose to build their savings in effort to create a financial buffer for future disruptions like COVID-19. As financial uncertainty seeps through the American economy, lenders are offering more flexible loan structures. Payment forbearance measures are “clouding the credit picture, and high levels of loan modifications are posing challenges to ABS and RMBS”. Borrowing appetite and reduced ability to pay may result in lower demand for credit and lower debt amounts.

Demand  for  mortgages  may  decrease if consumers are too afraid to buy during this economic uncertainty, and they may opt to rent instead. There could be lower interest rates for those willing to take out a mortgage, and the loans might be smaller as property in more affordable rural regions becomes preferred. Unsecured consumer lending has already been shifting to installment payments on pre-Coronavirus purchases.  Retail investors should note the report projects that “more e-commerce will strengthen demand for lastmile logistics facilities and delivery fleets, but may weaken demand for malls and other non-grocery retail”.

Top 3 Post-Pandemic Real Estate Transformations