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A new study has examined how the coronavirus pandemic economic impact transmitted from the asset markets to capital markets. The researchers focused on US-listed equity real estate investment trusts (REITs).
The study dubbed “A First Look at the Impact of COVID-19 on Commercial Real Estate Prices: Asset-Level Evidence” was conducted between January 21, 2020, to April 15, 2020 by The Society for Financial Studies and published by Oxford University Press. The newest adapted version was published on September 8, 2020.
REITs amid pandemic
During the pandemic, the technology was among the best performing and it reflects on the outlook of real estate. Notably, REITs that focused their investments on data center, cell tower, self-storage, and warehouse properties had positive abnormal returns during the early stages of the pandemic. However, retail real estate investment trusts were among the worst-performing.
Before the pandemic hit the United States, returns varied by the property type focus of the real estate investment trusts. In March 2020, the cumulative total return index for retail REITs dropped by 49%. During the same month, the total return indexes for office and residential REITs also plunged sharply in March 2020 at 25% and 26%, respectively.
The research further showed that diversified REITs underperformed because many hold retail and multiuse properties. On the other hand, there was low business for specialty REITs like casinos, golf courses due to low demands. In contrast, office and residential properties were less negatively during the research period mainly due to longer-term leases and relatively inelastic demand.
The study acknowledged that whether the shock of COVID-19 on commercial real estate prices remains significant in the long run depends on the resilience of the overall economy. It will further depend on how perceptions of risk change after the pandemic.
Relocation to small spaces
Big firms like Morgan Stanley that occupy large office spaces plan to relocate to small spaces due to working from home abilities. The researchers note that 37% of jobs in the United States are fit for remote working.
The findings further conclude that there will be permanent changes in work and lifestyle after the pandemic. The changes will affect the rent generating ability and perceived risk of different types of business activities.
The pandemic also had a heavy impact on commercial real estate businesses that depend on physical communication. The social distancing and lockdown contribute to the low business in high-density areas.
Amid the pandemic, investors have been able to differentiate the future income-generating ability of the various property types. In this case, the focus is on industrial and retail property types.