How Is Covid-19 affecting Real Estate?

[Kenneth Diaz]

Hello BP. As you know Covid-19 has been affecting everything around us and has been changing our world. Things are just very uncertain and unusual during these time's. I am planning on becoming a real estate agent in Houston (TX) to fund future investments and branch out to my passions. Due to this, I would like your opinions on how this is affecting real estate agents and investors, and will it have a permanent affect in these careers. How are agents/investors adapting? Are they having difficulties to produce sufficient income and/or cashflow? What are your thoughts? If you have any advice I would be glad to hear it. Thanks BP! and be safe. 

[Jonathan Twombly]

The issue right now is really the uncertainty.

There are aggressive buyers out there who are mistaking the current uncertainty for fear, and thinking that they are being contrarian by racing full-steam ahead to buy assets right now, while everyone else is "afraid."

But fear has not hit the markets yet, because rent collections are strong as a result of the CARES Act.

The issue for most investors is that they feel they cannot trust the current numbers.  Typically, you think of the trailing 3 months financials as representing as closely as possible what the next three months will look like.

But, right now, everyone understands the T3 numbers are being propped up by CARES Act stimulus - especially for C class assets where tenants may actually be making more money on unemployment than they were at their jobs.

No one in their right minds expects this continue this way indefinitely.  Currently the stimulus checks are set to end July 31.  And, though they are certain to be extended, it is also certain there will be a huge fight in Congress over the level of generosity that's appropriate, and for how long it will last.

In addition, no one knows exactly how big the rebound will be when all the economies are re-open, or whether there will be a second wave of Covid when they do.

Because of all this uncertainty, buyers and sellers are far apart right now.  Sellers want to point to the good collections numbers and claim everything is fine and they should still get peak pricing.  Buyers don't know what they are buying and want to build in a margin of safety of 20% or more from peak pricing.

(I actually know of people who are both buying and selling at the moment and taking these two contradictory positions, depending on which hat they are wearing at the moment.)

The disconnect alone has forced cap rates up, though it's not translating in the data yet because the deals closing recently were in the pipeline before Covid hit, and everyone else is holding their deals off-market in the hopes of a quick rebound.

If either (a) the economic openings do not restore the economy to where it was in January 2020 or (b) a second wave of Covid hits because of the openings, happen, then all bets are off.  I predict that in those circumstances MF asset prices will drop by far more than the 20% discount buyers are demanding now.