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Brave New World: COVID-19, Economic Disruption, and the Outlook for Multifamily and Commercial Real Estate

During an RMA Risk Readiness Special Coverage webinar, Victor Calanog PhD, Head of Commercial Real Estate Economics, Moody’s Analytics, provided an overview of the near-term future of the U.S. economy, and offered insight into thinking through the forces that are stressing various property types and geographic markets.

Calanog discussed near-term future outlooks for property types and geographic markets stating that property types with shorter term lease are at the biggest risk, particularly leisure and hospitality and the co-working space segment.

Pre-pandemic, Calanog expected a twenty-year high in terms of deliveries for 2020 in the multifamily segment. Recession and protracted slump scenarios produce an increase in vacancies, but construction pullback is a countervailing effect.

Historical reaction to downturns determine the relative focus and magnitude of distress in various property types and geographic markets. Recent record of oversupply will position any geographic market for distress if demand pulls back abruptly (as per a severe pandemic or protracted slump scenario). Recent record of poor performance, particularly when vacancies have been rising and/or rent growth has been moderating, suggests markets will not fare as well in a downturn.

Office and retail do not fare as well as multifamily. Office effective rent growth will take a hit given the depth and magnitude of the recession. What does the office market look like post-crisis with many companies reevaluating their office space? Retail will suffer worse than office given pressure from e-commerce and the effect of economic closure on stores.

It is difficult to speculate how property types will evolve over time. The optimistic perspective is that demand for multifamily remains strong in urban areas where those properties tend to cluster. However, the outlook remains uncertain with the sensible approach being to prepare for the worst and hope for the best.

A recording of the webinar is available for download here.