One of the biggest news stories of 2020 thus far has been the worldwide outbreak of the novel coronavirus (COVID-19) epidemic . It seems that everywhere we look, the proliferation of this disease has caused more and more disruption in our everyday lives—from hundreds of cruise ship crewmembers and passengers becoming captive victims of the sickness, to the cancellation of major events such as South by Southwest, to record-setting stock market losses, the virus is having an outsize impact across the globe. For me, and probably for many other lawyers, the first time this crisis really hit home was when the initial case of community spread in New York turned out to be a midtown Manhattan attorney.
You may be asking yourself why I’m talking about a health care calamity in my real estate blog. To be honest, given the massive impact that COVID-19 appears to be having on everything else, it made me wonder about this question: What effect will this illness have on our California commercial property investments? As it turns out, coronavirus could have a potentially significant impact on the real estate industry in California, and in ways that you might not have thought about. This week’s article reviews how the fallout from this upheaval might bear upon property matters in the Golden State.
As noted above, equities have been on a wild ride this year, with extreme volatility and major losses taking place over the last several weeks. With shareholders fleeing the stock market, their portfolios are burgeoning with cash. Since these funds can’t just lie around and do nothing, they need someplace to go. Because commercial real estate in California is so valuable, it is a ripe target for those exiting the stock market to position their money.
In the wake of massive stock selloffs, we have also seen central banks lower their interest rates as a means of mitigating volatility in those markets. Along with the flood of cash being produced by these selloffs due to stock market volatility, these lowered interest rates will sooner or later also work their way into property capital funding sources. When this happens, we can also expect to see demand for investment property increase.
We are already starting to see these financial impacts assert themselves. For example, many foreign investors are putting their money into single family residential real estate in the United States, as a safe haven from the coronavirus relative to other markets. Another manifestation of the impact of coronavirus on the real estate industry is increased refinancing demand based on falling interest rates. In the face of this demand, lenders are both (1) scrambling to focus their resources to meet this demand by additional hiring and staff reallocation and (2) delaying the refinancing process to hold on to those existing higher loan interest rates as long as possible.
In addition to these more abstract financial impacts, there are the quotidian consequences of our concerns about the spread of this infection that are also making themselves felt. As face-to-face business encounters appear to be riskier, the appetite for remote transactions seems to be increasing. In conjunction with the impact of blockchain technology on real estate investing that I wrote about in my last article, we are also seeing an increase in the availability and employment of online investment in real estate, as these technologies become more functional and popular among investors.
Finally, for existing owners of commercial real estate (particularly office space, but other types of property where large numbers of people gather as well), best practices for the management and operation of these properties must be carefully reviewed and implemented. Not a day goes by without hearing about the adoption and execution of new health protocols by businesses and institutions both large and small. These measures not only mitigate the risk of infection, they also help reduce the likelihood of being held liable for someone contracting coronavirus as a result of unsafe building procedures.