CMBS Market, CRE Investors Recoil On Coronavirus Fears As Fed Cuts Interest Rates
The commercial real estate market is in a state of ambiguity as coronavirus fears push spreads on commercial-mortgage backed securities wider and investors begin to second-guess financial ties to hospitals, hotels, movie theaters, malls, office buildings and shopping centers.
While it is too soon to panic or know the full extent of COVID-19's economic impact, commercial real estate assets reliant on public traffic are particularly at risk if a global pandemic occurs, Trepp Analytics said in a report this week.
"It's certainly speculative," Trepp Senior Managing Director Manus Clancy said of all the market fears.
Still, Clancy said landlords could lose income if offices, movie theaters, hospitality centers and stores see a decline in traffic or close in the face of virus concerns.
An armageddon scenario for CRE assets is unlikely at this point, but investors in CRE and mortgage-backed securities are unable to place the risk at zero, according to Clancy. For this reason, CMBS spreads widened this past week as a great stock market sell-off occurred. Worried eyes are casting most significantly on highly trafficked real estate.
"It's a scenario you can't fully dismiss if people start recommending that schools close or large swaths of the population work from home," Clancy said.
"It would go hand-in-hand that people would say, well, if that's the case, we probably shouldn't go to the movies or we probably shouldn't eat at Applebee's tonight. Let's order in or go where there is less concentration [of people]."
Clancy said risk managers are not pricing these scenarios into their CMBS, REIT or CRE deals just yet, but prudent investors are probably wondering what could happen if public places associated with REITs or CMBS deals close for even short periods of time.
"There's no panic at this point, but just a lot of people watching how it plays out," Clancy told Bisnow.
These same fears shook the stock market last week, prompting the Federal Reserve to cut its target federal funds rate by 50 basis points.
The Fed said economic uncertainties created by global pandemic fears prompted the board's first rate cut larger than 25 bps in 12 years.
Cutting the short-term interest rate is a positive step that cushions parts of the economy in the midst of pandemic fears, WalletHub CEO Odysseas Papadimitriou said in a report Tuesday.
"Consumer spending will go down if people stay home because of the coronavirus," he wrote. "For example, if a restaurant owner can no longer pay rent, the property owner might not be able to pay its loan, and the bank that made the loan might end up suffering as well."
While a rate cut is better than nothing, it is in no way a panacea for curbing the risks associated with COVID-19, Papadimitriou and Clancy noted.
"I am not sure what a lowering of the interest rate does per se for someone who is suffering from the panic over this," Clancy said.
If a restaurant loses money and goes delinquent on its rent, a lower federal funds rate does not solve this problem, Clancy said.
The only thing that could solve this type of situation is the virus running its course and landlords allowing CRE tenants some flexibility if times get tough.
"An interest rate [cut] is not going to help that person who is running a cruise line or a hotel in a 24-hour city ... only time will help that person, and the headlines getting less negative," Clancy said.
The Asset Classes With The Most Upside
The safest CRE bets in the event of a massive outbreak are data centers and industrial plays, according to Trepp.
If more Americans sit home and avoid public places, the analytics firm foresees e-commerce distribution facilities experiencing higher demand as online ordering increases.
Meanwhile, employees working from home or avoiding travel altogether may become more reliant on data center support to communicate with their coworkers and clients.
"Data centers stand to benefit from increased reliance on remote office technologies, such as teleconferencing/web conferencing and work-from-home," Trepp wrote.
Infrastructure REITs that own fiber cables, wireless infrastructure, telecom towers and energy pipelines also stand to benefit if remote office work increases during any type of coronavirus scare, Trepp said.