The COVID-19 pandemic has dramatically slowed national economies around the world. While few industries have escaped entirely unscathed, none have been hit as hard as the global commercial real estate sector. The second quarter of 2020 shows a dramatic decrease in commercial real estate transactions, with some data mirroring 2008’s global financial crisis. Despite some alarming data being discovered by experts, opinions are somewhat diverse regarding what data trends mean for the next several years and what hopefully is a post-COVID-19 world.10 Potential Outcomes of the Current Commercial Real Estate Market
The following are just a few of the outcomes commercial real estate experts are preparing for.
A MARKET BUBBLE CONTINUES
Many experts believe a commercial real estate bubble is forming due to stagnant and declining market transactions. Although transactions have declined, demand is actually up due to a shortage of commercial real estate inventory. This shortage drives up prices on existing listings as the pandemic continues to keep many properties off the market.
THE BUBBLE BURSTS
In the absence of a COVID-19 pandemic, some commercial real estate experts believe that a flood of new market listings could become a reality sooner rather than later. If too many commercial real estate properties hit the market all at once, it has the potential to cause a sharp decline in existing property prices.
THE MARKET AUTO-CORRECTS QUICKLY
Some commercial real estate experts believe that data trends certainly point to potential pitfalls ahead. However, defaults on commercial properties remain low. Some feel that this means that the market is still somewhat healthy, despite a decline in overall industry-wide transactions, and that any sudden shift in the market will be auto-corrected in the near term.
THE MARKET AUTO-CORRECTS SLOWLY
Many commercial real estate experts believe that the damage caused by the COVID-19 pandemic is much more significant than what current data trends highlight. For example, they feel that default deferments are masking the true volume of loan holders currently underwater. It is thought that once the true volume of foreclosures is revealed that any potential auto-correction of the market will take several years.
A SERIOUS MARKET CRASH OCCURS BUT DOES NOT SPREAD
A marginal number of experts within the commercial real estate market believe that a severe market collapse is imminent. However, many of these experts do not feel that a commercial real estate market meltdown has the potential to spread into other financial sectors, such as the far more resilient residential real estate market.
A REAL ESTATE-WIDE CRASH OCCURS
Some experts are not so certain that a potential commercial real estate market meltdown would not be contagious. Some experts believe that the residential real estate market is also masking tremendous strain due to pandemic-caused foreclosure deferrals. If the commercial real estate sector falls, so will the residential real estate sector.
NOTHING HAPPENS AT ALL
The smallest group of commercial real estate analysts believe that no significant or noticeable change in the market will occur at all. This minority class of experts believes that current data trends support the hypothesis that the pandemic isn’t responsible for the current state of the market and will continue to remain stable.
A TOTAL FINANCIAL MARKET CRASH UNFOLDS
A very small number of commercial real estate experts believe that a total financial market crash is imminent. These same experts believe that a commercial real estate market crash could be enough of a spark to cause a 2008-style global financial system crash. These experts feel that the longer the pandemic rages on, the more likely this apocalyptic scenario will come to be.
MASSIVE CONSOLIDATION OCCURS
Many commercial real estate sharks believe that a market correction is imminent and that prices will drop significantly over the next 12-months. Once this happens, it is thought that major market consolidation will occur as banks and big players scoop up available properties in a post-pandemic low spot.
A LIMITED BANKING CRISIS WILL OCCUR
The largest market share within the commercial real estate market is, without a doubt, held by large corporate lenders. Some experts feel that these banks will have their positions exposed once pandemic default deferrals expire, and many of these banks will take on enormous losses as a result.
We have only just begun to see the effects that Covid-19 will have on the commercial real estate industry. Lenders and investors may want to consider a plan and start to adapt now to avoid a wave of significant foreclosures and vacancies.