6 Frightening Real Estate Market Trends (Just in Time for Halloween)

Although trick-or-treating has been postponed in many cities due to COVID-19, there are still horrors aplenty this Halloween season. The chance of a prolonged pandemic, implications of the presidential election and lingering mortgage forbearance issues are just a few of the scary scenarios spooking real estate investors and lenders. Here are six of the more ghoulish realities the real estate industry is facing.

1. States and cities suffering from revenue shortfalls may look to commercial real estate to fill their cauldrons.

States are anticipating budget shortfalls of about $434 billion from 2020 through 2022, according to The Wall Street Journal. In California, ballot measure Proposition 15 would permit local governments to tax commercial real estate based on current value rather than on the last time a property was sold, generating up to $11.5 billion in extra tax revenue for local governments.

2. A massive flight to suburban housing is fueling an inventory crisis and hurting big cities.

COVID-19 has accelerated suburban migration, especially among the 60 percent of millennials age 30 and older, as the pandemic made working from home a norm and small city apartments and public transportation more harrowing. With mortgage rates hovering near historic lows, existing home sales soared 21 percent in September from a year earlier, the highest rate since May 2006. As a result, total inventory available for sale has plummeted 37 percent year-over-year, and homes are on the market an average of just 12 days before going pending, according to Zillow. Meanwhile, big cities are bearing the brunt of the residential exodus: Manhattan’s apartment vacancy rate rose for a fifth consecutive month in September and the number of available rental listings tripled to a 14-year high.

3. The urban exodus is also haunting office occupancies and rents in central business districts.

Rents fell 4 percent in San Francisco between March and September, more than double any other major U.S. city, as tech companies lean into remote work and consider a distributed workforce. Office space for sublease in Manhattan has spiked, driving down asking rents. On the bright side, several high-profile office moves – such as Facebook’s deals in Manhattan and Seattle -- suggest COVID may be short-term shock; meanwhile, the desire for shorter, more flexible leases could revive the co-working sector.

4. Commercial real estate is facing a spine-chilling rise in operating costs, threatening to dent net operating income.

Operating and capital expenses are expected to climb with retrofits of HVAC systems to prevent airborne virus transmission, new cleaning and safety protocols, reconfiguration of offices to promote social distancing, and revamped industrial layouts to accommodate more space per worker, especially as ecommerce explodes. (One positive: The pandemic is boosting investment in innovative technologies.)

5. Nearly three million residential mortgage borrowers remain in forbearance plans as of October 20.

That’s about 5.6 percent of the 53 million home loans in the U.S. The pandemic has been toughest on workers in leisure, hospitality, services and manufacturing, and a spike in COVID-19 infections has led to renewed shutdowns that could continue to hurt employment. On the positive side, the number of loans in forbearance has dropped from 4.76 million earlier this year.

6. The Grim Reaper is coming for ailing malls and hotels.

Longstanding woes in the retail sub-sector have been compounded by COVID-19. Store closures hit a record in the first half of the year, and foreclosures of malls and even storied hotels are beginning to escalate. One quarter of CMBS hotel loans are in special servicing. Despite this nightmare scenario, parts of the retail landscape are flourishing, including some power centers, properties anchored by grocery and drug stores, and omnichannel retailers offering curbside pickup. Some surveys are forecasting an uptick in Christmas spending, with consumers starting online shopping earlier to avoid delivery delays.

In the midst of this frightening landscape, it’s worth noting that institutional investors continued to acquire more assets than they sold in the second and third quarters of 2020. Given historically low interest rates, commercial real estate assets remain compelling on a risk-adjusted basis. Meanwhile, residential housing is seeing a surge in demand far outweighing supply.

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