The coronavirus pandemic is now a global phenomenon with a third of the world’s population now living under some sort of lockdown or quarantine. People can no longer work, meet, eat, shop, and socialize as they used to. The working world quickly transformed from business as usual into office closures, work-from-home mandates, and production stalls. As a result, this has created an unprecedented crisis for the commercial real estate industry. Undeniably, the COVID-19 impact on real estate is seen in both the commercial and residential sectors. However, as the crisis continues to unfold, research shows that the effect of the coronavirus is more significant on commercial properties. In this article, we dive into the impact of the pandemic on commercial vs residential real estate and see what experts have to say to those with commercial investments in the US real estate market 2020.
Short-Term Commercial Real Estate Downturn
Over the past several years, commercial real estate investments have generated steady cash flow and returns above traditional sources of yield. Since the virus outbreak, however, this reality has changed. Now, a lot of experts predict the investment activity in commercial properties to slow globally over the short term. Right now, there’s a moment of pause across the market no matter the property type – multifamily, office, or retail. Retail, however, is the most vulnerable sector in commercial real estate during a pandemic. That’s because while many businesses have an online presence, the majority of retail businesses depend on foot traffic – working remotely is not a realistic possibility for their employees. This includes stores, barbershops, restaurants, and bars.
Depending on how long this situation lasts, a real estate slowdown means that retailers (many of whom lack sufficient capital to operate in a pandemic) may become unable to pay their rents. Because of this, landlords of commercial rental property may find themselves in a cash crunch which might lead to mortgage defaults. Moreover, if a lender assesses a commercial property value on the basis of earnings, this decline in rental income will lead to a decline in appraisal values. In turn, this makes it difficult to refinance if lenders tighten up their loan-to-value ratios, which can be expected according to experts. Commercial vs residential real estate
Furthermore, city lockdowns, travel restrictions, and social distancing are limiting real estate investors’ ability to perform due diligence. Not only that, but it’s even more challenging to execute commercial real estate transactions. Those who are already investing in commercial real estate can also expect operating expenses to increase. This is especially true for commercial properties that require increased cleaning of common areas as a proactive measure or because of having a person or persons with potential exposure to COVID-19 enter the building. All of this tells us that 2020 might not be the best time to buy commercial property.
Commercial vs Residential Real Estate Activity
While commercial properties tend to generate high returns, residential real estate properties are known to be much safer investments – especially during a pandemic. While businesses are shutting down, people will always need places to live. So it’s unlikely that the COVID-19 pandemic will have long-lasting effects on the demand for the residential real estate sector. Landlords of single-family homes and small multi-family homes can expect to make rental income. Plus, there are still motivated sellers on the market in 2020. So if you’re planning to buy a residential property to rent out, you can certainly find a good real estate deal out there. Make sure to use Mashvisor to find the best homes for sale in no time!
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CARES Act’s Impact on Commercial Real Estate
If you own commercial rental property, then your tenant probably can’t open their doors because of shelter in place orders and/or social distancing restrictions. In the majority of US states, these restrictions may not be lifted until the end of May or early June. As a result, many commercial real estate tenants may not be able to pay their rent as previously mentioned. To make matters worse for commercial investors, many US states have issued a temporarily prohibit on evictions. This means that you legally can’t evict a tenant from your commercial property if they don’t pay their rent during this time.
On March 27th, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This is a $2 trillion coronavirus stimulus package that aims to provide financial assistance to struggling US industries and individuals during the COVID-19 pandemic. If you’re investing in commercial real estate, then you’re most likely wondering how the CARES Act will affect you and your real estate business in 2020.
If your real estate business is classified as a small business with 500 employees or less and your business has fallen on hard times due to the coronavirus, you may be eligible for low interest rate small business loans. Keep in mind there is an upper limit of $10 million and how much a business receives depends on the average monthly payroll expenses for the previous year. You can use the money from these small business loans to cover mortgage interest, rent, payroll, as well as utility payments. There are also tax benefits that may apply to those in the real estate industry whether commercial vs residential real estate. To fully comprehend which tax benefits apply to you, we advise speaking with a tax professional.
Should You Consider Commercial Real Estate Investing in 2020?
Are you planning to buy an investment property in 2020 and deliberating between commercial vs residential real estate investing? Depending on how long the COVID-19 pandemic continues, there may be opportunities for commercial real estate investing. This could include commercial rental properties approaching the end of their financing term or properties with troubled operations. However, there’s no denying that residential rental properties are a better investment option at the moment. Not only are residential rentals can perform better during a real estate slowdown, but they also come with fewer risks than commercial rentals.
Moreover, the COVID-19 pandemic could permanently change habits that affect demand for commercial real estate like hotels, especially in cities with high numbers of coronavirus cases. On the other hand, US real estate market trends suggest that there’s still a strong demand for residential long-term rentals as the coronavirus and the looming recession affect people’s buying decisions. Most housing experts forecast home prices to remain stable and interest rates to remain low in 2020 and beyond. Together, the favorable demand, home prices, and interest rates make the perfect mix for residential real estate investors.
If you’re convinced to buy residential real estate, Mashvisor can help you find the best homes for sale in the US real estate market. We offer tools that allow you to find investment properties for sale as well as off-market properties (foreclosures, short-sales, and auctioned homes). We also help investors make better decisions by providing predictive analytics and readily calculated property data to help in conducting a rental property analysis in a matter of minutes. Sign up for Mashvisor with a 15% discount using promo code BLOG15 and start searching for and analyzing the best properties for sale from the safety of your home!