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As Coronavirus Spreads, Real Estate Dealmaking Slowed By Travel Restrictions

As the world grapples with implications of the fast-spreading coronavirus, some real estate players are facing the reality of deals being held up by quarantine measures, travel restrictions and the deep sense of uncertainty permeating the market.


The pathogen known as COVID-19 — which has now killed 11 people in the U.S. and led to officials declaring a state of emergency in Los Angeles — has roiled the stock market, shut down conventions all over the world and disrupted supply chains

This week, the Federal Reserve announced its first emergency rate cut since 2008. Tuesday, the benchmark 10-year U.S. Treasury note dropped lower than 1% for the first time ever, and CMBS spreads have widened. In real estate offices, real-time impacts are already being felt.

“I have a very large deal in Manhattan where an investor from out in Asia was supposed to fly in, and that doesn't look like it's happening anytime soon,” Ariel Property Advisors Executive Vice President Victor Sozio told Bisnow this week. “As it relates to that specific case, it's pretty much killing the deal." 

Real estate asset values are not subject to the volatile swings of the public stock markets, but anyone who buys a property often wants to see it in person, industry experts said. Any restrictions on or reluctance to travel could hurt ongoing deals.

“Real estate is a hands-on business, it’s a tangible asset. And if a due diligence trip is a requirement before closing, and many cases it is, [coronavirus] could delay the closing,” said Susan Swanezy, a partner with Hodes Weill & Associates, a real estate advisory firm with offices in London, New York and Hong Kong. “If you have a travel restriction, you can’t go see the property … we’re expecting it to have an impact and to slow things down.”

She said she hasn't yet seen instances of people not moving forward with a deal, but said a fund manager considering a deal she is working on is waiting until the virus is stabilized before they travel internationally for a due diligence trip. She declined to give specifics of the deal and the locations.

"Every day, we're hearing more groups that are saying, 'We have a travel restriction' — and this is managers and investors,” she said. ”Do I expect it to have an impact? Yes. How significant? Too soon to tell … [but] real estate people are pretty resilient, and they're good at finding work-arounds.”

Workers disinfect Tehran subway wagons against coronavirus.

In Italy, schools, universities, cinemas and theaters were shut down on Wednesday, with the virus having killed more than 100 people there. In the U.S., there have been more than 135 cases of the virus detected, and Congress agreed to a deal to set aside $8.3B in emergency aid to deal with the illness, The New York Times reports.

Many sources pointed to the passing nature of SARS, Swine Flu and, more recently, the Zika virus as reasons not to predict a widespread economic slowdown. Others said there is no doubt there is a mounting sense of fear about how long this could last, which is throwing an uncertainty wrench in the works for deals.

“Deal activity will slow down as people pause, but not so much because people aren’t traveling,” said Origin Investments co-founder Michael Episcope, who is based in Chicago. His company represents around 1,100 investors for funds that invest in multifamily real estate.

“The biggest thing is too much uncertainty, and the inability to understand what lies ahead will put some money on pause," he said. "Deal activity will slow because when you are underwriting you are assuming a normal environment — and there’s nothing normal about today.”

He added that no one really understands the full magnitude of the virus, but he said properties could experience lower net operating income for more than a year as a result, although borrowing costs for apartments in particular will drop.

“This too will pass, like every other crisis before it,” he said. “This may be nothing and we might be done in three months, and it could last another year.”

Compass Vice Chair Adelaide Polsinelli

David Eyzenberg said he has halted all nonessential travel at his real estate investment bank, Eyzenberg & Co. But business will go on, he said.

“I’m not a panicker … It’s not like the end of days,” he said, though he added his company will underwrite traditional hospitality assets with the expectation that their cash flow will be flat.

“The flu kills multiples every year. We’ve never had a conversation on how the flu is affecting the office buildings,” he said.

In terms of deal flow, multiple players noted activity in places like New York City was already slow before the virus reached it. Some $26B worth of investment-grade real estate sold last year in New York City, a 31% drop from 2018. Meanwhile, Chinese investors were net sellers of U.S. real estate in 2019 for the first time in a decade.

“The market was soft before the news of the virus hit,” Compass Vice Chair Adelaide Polsinelli wrote in an email. "If you aren't afraid to do business in real estate in New York City, you aren't afraid of coronavirus."

Polsinelli, a commercial investment sales broker, said she is buying face masks with her name on them to give to clients on site tours. Plus, she is focused on the silver lining, saying that some investors are seeing this as an opportunity to lock down deals while the competition is slowed down.

“This is the perfect storm for buyers; competition has slowed down, sellers are nervous, interest rates are low and opportunities are increasing.” she said. “My activity level has increased in the past two weeks.”

Juniper Capital Group President Nate Lowy has also been busy. The financing broker said in the last week he has done 30% to 40% more loans than normal as owners and buyers track the interest rates and mull how it might play out in the next few months.

“A lot of borrowers have looked to refinance loans that they closed as quickly as a year ago, just simply to reduce the rate,” he said. “The New York banks have all lowered their rates from call it the mid-to-high-3% ranges to the high 2s, low 3s … Appraisal firms are busier than ever. Law firms are busier than ever. Banks are busier than ever.”