To say that COVID-19 is affecting the real estate market is an understatement. To get a better understanding of just how much, we compiled yearly stats for all commercial, residential, and multifamily sales in Orleans Parish — as expected, April sales are down dramatically. To be specific, 40% down in 2020 when compared to April 2019, and down 32% when compared to March of this year.
There is a new level of uncertainty floating all around, a potential risk in the housing market, but we must continue to wait to understand the full impact of this situation.
Potential positives for homebuyers despite all the doom and gloom
Honestly, it’s healthy to be realistic about the economy as a whole right now, but that doesn’t mean that some won’t benefit from this. Forever Homeowners (trademark pending!) may just come out of this thing a little better off from a real estate perspective than they were before.
Everyone in this city has a friend (or twelve) who either has lived or plans to live in their current home until the water washes them away. Well, not sure if you’ve noticed, but this group, in general, does not tend to look so kindly on those who have purchased homes in their beloved neighborhoods for the purposes of using the properties as Short Term Rentals (STR’s).
While there will likely be a surge in travel as restrictions are lifted, even a modest drop in tourism over the long term would have a pretty substantial impact on the increasingly regulated STR market. As we noted last week, hundreds of New Orleans STR owners have placed their properties on the long-term market as rates have plummeted locally on sites like Airbnb and VRBO.
It’s evident that STR’s have had a hand in increasing the price of housing locally, both for buyers and renters, so presumably, the lack of demand for these properties from out of town and local investors will have a negative impact on housing prices (positive if you’re looking to buy!). But if you’re a Forever Homeowner, you don’t really care much about the short-term fluctuations in the price of real estate. If you’re looking to become one, you’re going to see this, plus having less competition from non-owner occupants, as a positive. The reduced income from STRs may also push some investors to sell these properties to Forever Homeowners, bringing neighbors back to neighborhoods.
Additionally, Forever Homeowners, as well as investors, are seeing some of the lowest interest rates of all time. For most, there literally has never been a better time to refinance their mortgages, and it’s not clear that we’ve even hit bottom. The same goes for those looking to get into the group. The difference between a rate of 3% and 4% on a 30-year $500,000 loan is over $100,000 ($279 each month). That’s a lot of Po’boys!
How the commercial market is going to be affected by COVID-19
Working from home and shopping online have both been growing in popularity in recent years, and it is our belief that this event substantially increased the rate at which we are progressing toward a more digital world. Twenty years ago, most cell phones didn’t even have cameras, Amazon made 2.6 billion in gross sales, and Blockbuster was going strong with nearly 9,000 stores. Today, we are video chatting seamlessly across the globe with no regard for physical interaction, Amazon’s sales numbers are at 280 billion dollars per year, and Blockbuster is down to a single store in Oregon. To say we are seeing a change in how business is done is an understatement.
Anecdotally, a number of young professionals have said some version of “they can’t make me go back”.
Who can blame them? Spending all day with your pets and loved ones while avoiding forced social interactions with people you have very little in common with except your place of business is unsurprisingly something that workers seem to value. Factor in the amount of time many people spend getting ready and commuting, including getting settled once they arrive, and some workers are gaining hours of potential productivity and recreation back in their lives.
We don’t mean to suggest that the physical office space is on its deathbed. Humans are social creatures who value physical engagement, and that won’t change overnight. But there’s no denying that many employees and employers are truly reconsidering the need for costly physical office space, especially when a full-scale return to the workplace is so uncertain for this pandemic — and any that may occur in the future.
Inevitably, there will be more remote working as a result of this, and many employees and employers will see that as a positive. While subsets of the commercial office sector may see growth, we believe traditional office space is in for a rough time. The idea of sitting in an office for eight hours a day breathing recirculated air is a little less appealing after a month of working from your back patio in the sunshine.
As for retail, it was struggling even before this occurred. While smaller mom-and-pop-style shops and boutiques are having a bit of a resurgence in recent years, a huge chunk of retail space in America is occupied by large chains and department stores who have been facing doom and gloom since well before COVID-19 became part of our lives. America has always had more retail space than other countries, and a lot of that space hasn’t been in particularly high demand in recent years.
We’re not entirely sure what kind of impact this will have on smaller retailers and consequently those that own the physical buildings. In a city that relies so much on tourism and oil and gas, it’s hard to believe that we’re just going to jump back into 2019 sales levels — or better — anytime soon. There are many retailers who have similar fears. Many local companies who were thinking expansion in 2019 are now pumping the brakes waiting for a more predictable market.
What the real estate market always comes down to is supply and demand. With too much supply — and demand likely on the downswing for physical retail and office space — we’re likely going to see the value of these spaces hit negatively. As some tenants find themselves unable or unwilling to pay or renew their leases — and without an abundance of other businesses expanding — commercial landlords may find themselves with a whole new set of problems related to COVID.