Wow, what a crazy time we are in. Less than a month ago, I was at Copper Mountain when the Governor announced the closure of all ski resorts. Shortly thereafter, kids were running around the house with schools closed and most businesses were shuttered or working remotely & the economy was upside down. Does the pandemic feel familiar with another recent crisis? What does this mean for Colorado real estate? The ferocity of the economic shut down from the Coronavirus in Colorado is unprecedented.
Short Term impacts:
The ferocity of the economic shut down from the Coronavirus in Colorado is unprecedented, but it is important to note that there will be both short- and long-term impacts from the pandemic. In the short term, everyone that owns property will be impacted negatively. Real estate like the rest of the economy is intertwined so a hiccup along the line ripples through like a wave in the ocean. Currently there is a cash flow issue for most of the economy. Businesses are closed, employees are laid off or furloughed and cash is tight. Commercial tenants are not able to pay as they have no income from operations, their employees are unable to pay their rent, visitors are not coming to hotels, etc… Nobody can escape the pain in real estate, not even the medical sector.
With the Coronavirus, one would expect medical to be thriving, but just the opposite is occurring. Other than hospitals, many offices have been shuttered from dental offices, surgery centers, optometrists, etc… Long and short the next 90 days are tough for everyone in the economy including all property owners.
Long term impacts of the Coronavirus on Colorado Real estate:
Fortunately, the short-term issues should resolve with the economy opening back open to some extent in the next 60 days or so as the virus wanes. The real question is how will the pandemic rapidly change the Colorado real estate landscape in the future. To highlight the changes, I’m going to discuss some key property groups.
- Multifamily: In the short term multifamily will feel the pain from the lack of cash flow from tenants. Long term people are still going to need a place to live and they will continue to flock to desirable areas like Denver. Multifamily should hold up after the pandemic.
- Industrial: Industrial before the pandemic was in high demand; this will continue into the future as companies require distribution space as close to the customer as possible. With the continued rise in e-commerce this trend will only accelerate. In the future you will likely see more “onshoring” which will drive further demand from companies as they work to manufacture critical items (like masks, ventilators, etc…) in the United States.
- Retail: This is the obvious one. Many retail locations will become obsolete, stores like Macy’s will likely never come back. Unfortunately, many small stores will also be impacted as the virus has shut down sales for months. Consumers will continue to increase their utilization of e-commerce platforms further dampening bricks and mortar. Fortunately not all retail will be impacted the same, class A retail will likely weather the storm better than others.
- Hospitality: Travel will be altered for a while after the pandemic passes. Many large conventions will likely move virtually. Furthermore, a recession will likely dampen travel as well. The hospitality industry will be in for a rough ride over the next 3-5 years.
- Auto: The virus has radically changed how we buy and sell cars. I recently bought a car and did 100% without ever visiting a showroom. I sent them the vin, service history, and pics of my car for the trade, they sent me docs via fed ex and delivered the car. Why do auto dealers need huge staff and showrooms? They don’t! The auto industry will be transformed with much smaller locations and considerably less sales staff.
- Banks: Pretty much all banks have closed their walk-in locations relying on their apps and drive throughs. Consumers are migrating to the new technology quickly which will make many bank branches obsolete. The Coronavirus will accelerate this trend.
- Office: Many businesses will figure out that having a disbursed work force is just as productive as having everyone physically in the office and it is also considerably cheaper. Before the crisis, class B/C office was already challenging to lease look for this trend to not only continue but also impact class A space.
- Restaurants: A survey conducted by the Colorado Restaurant Association (CRA) found the state’s industry lost an estimated $465 million in sales and 150,000 jobs in the first 22 days of March. At the time of the survey, 14% of restaurants said they’d permanently close if stay-home orders were extended. Depending on how quickly the economy gets back, the restaurant sector will be hit very hard. The million-dollar question is how will consumer preferences change as a result of the virus on eating out.
It is important to remember that the sky is not falling. Colorado is a diverse and strong state economically and will remain a desirable place to live and work. This will allow many of the properties that might be “losers” initially from the virus to be repurposed and turned into winners with some creative thinking.
Mark Twain fortuitously stated that “history does not repeat, but rhymes”. When the pandemic first hit, the rhyme that came to mind was 2008 when the markets cratered leading us into the deepest recession in recent memory. Fortunately, today’s economy is much more stable before the pandemic than in 2007 with endless credit. This will make the recent crisis considerably less destructive than the last one. The coronavirus pandemic will initially feel familiar and rhyme, but will not repeat the 2008 debacle.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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