The outbreak of COVID-19 has rapidly spiraled into a severe blow to the US economy that will have negative short-term consequences and could lead to long-term structural changes for real estate markets. Although parallels can be drawn to past recessions, this was different for several reasons — some positive, some negative. First, the swiftness of the COVID-19 downturn was unprecedented. Within days, cash flow for certain property types (such as hotels) ground to a virtual halt, and most property sectors are still experiencing various levels of decreased rent collection compared to historical figures. In contrast to previous recessions, real estate entered the COVID-19 downturn with solid fundamentals — relatively controlled supply, low vacancy, healthy transaction volumes and responsible use of leverage. The depth and length of the recession are currently unknown. But based on the strong position in which real estate entered the downturn, we remain optimistic that over the medium term, real estate will regain its solid foundation despite the bumpy road ahead.
However, dislocation creates opportunities, which will likely be the case with the COVID-19 downturn. While most sectors will experience some distress, the disparity between property types will be pronounced. To capitalize on the distress, investors will have to maintain a contrarian mindset and conviction to target property types such as hotel and retail. A low-interest-rate environment is likely to persist in the years that follow the pandemic, favoring property types with lower correlation to GDP and those that rely less on economic growth. These sectors will become more attractive, and investors should focus on diversifying their private real estate portfolios by property type, geography and cash flows that have correlations to various economic drivers.
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