As COVID-19 continues to make daily headlines, questions are circulating about what a possible pandemic could mean for the hotel industry and commercial real estate. While the United States economy expanded at a pace of 2.1 percent at the end of 2019, there are fears that gross domestic product growth will slow if the virus isn’t contained.
Since the coronavirus outbreak was first reported in December, more than 73,000 cases of the virus have been confirmed, resulting in more than 1,870 deaths as of last week, according to CBRE’s recent report, “U.S. ViewPoint: Potential Impact of Coronavirus Outbreak on U.S. CRE Industry.” By comparison, the seven-month SARS epidemic of 2003 saw about 8,100 people infected and 774 deaths.
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Even so, CBRE analysts reiterated that it’s too early to say whether growth forecasts should be adjusted downward for 2020, standing with its forecast of about 1.9 percent. By comparison, the Federal Reserve forecasts 1.7 to 2.3 percent annualized GDP growth for the first quarter and then the remainder of the year.
“That said, Fed Chairman [Jerome] Powell indicated that he is watching the situation closely,” Spencer Levy, chairman of Americas research and senior economic advisor for CBRE, said during a flash call titled “Coronavirus Outbreak and Potential Impact on U.S. CRE Industry” on Thursday. “If you watch the markets that estimate the odds of a Fed rate cut, those have gone up significantly from about a 4 percent odd to about a 40 percent odd. We believe that one or two cuts from the Fed in interest rates in 2020 are more likely than not.”
Levy said the biggest short-term impact will come in the way of negative sentiment, which is the bad news. The good news is that in similar previous situations such as the SARS epidemic, post-Brexit and post-Trump election, bouncebacks were seen later in the year.
Of course, he noted that the tourism industry will see an impact, citing that Chinese travelers represent about 7 percent of visitors to the U.S. and 16 percent of total spend. Larger markets that attract about 80 percent of all Chinese tourism, such as San Francisco, Los Angeles, Las Vegas, Boston, New York and Washington, D.C., will feel some effects.
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Levy compared the impact in the hotel market to what happened in Toronto in 2003 with SARS, or severe acute respiratory syndrome. Toronto was a market indicated by the World Health Organization as having an outbreak. Because of that, Toronto’s hotel demand experienced a significant drop of about 30 percent a month for approximately six months. Markets that weren’t directly hit by the WHO warning, such as New York, did see a decrease in demand—but by contract, the fall-off translated to a decrease in demand of about 5 percent for about three months.
“The moral of that story is that if you get that type of WHO warning, it’s obviously a much more significant impact than those markets that do not. And, the impact was short-lived and relatively shallow, even in major markets like New York,” Levy said.
An Opportunity for Investors
Levy said that headline risk can equal opportunities for investors. “A short-term negative impact creates opportunity for those who see the world through a longer-term lens,” he said.
Levy added that the stock market is the single biggest indicator of consumer and business sentiment. And while the market did go into full correction on Thursday morning from a technical standpoint, we are not yet in a bear market.
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That means the ‘denominator effect’ that so many people are concerned about—institutional investors reducing their investment into commercial real estate—is not yet on the table,” he said. “What is on the table is the decline in sentiment primarily among private investors because of their concerns about the overall state of the economy.”
He reiterated that CBRE’s core message is that there should not be an overreaction from a private or institutional point of view because it’s too soon to say what the long-term implication will be from the coronavirus.
“We believe that if and to the extent that you do see a modest downturn in deal volume in the short term because of travel restrictions or people having difficulty underwriting assets, as we saw with the SARS epidemic in 2003, post-Brexit, and then post the Trump election, we do believe they will be picked up for later in the year as we saw in the other events,” Levy said.