Will Coronavirus Destroy Our Real Estate Market?

Will Coronavirus Destroy Our Real Estate Market?

COVID-19 is wreaking havoc on the real estate market at the Plaza Brickell and everywhere.
I was working on this study about the evolution of the prices at the Plaza Brickell in the 2 towers, from 2011 to 2019. Interesting stuff I was thinking.
And then we went through the most hectic 4 weeks I have ever witnessed in my lifetime. I didn’t see the start of the 1940-1945 world war (nor the end for that matter), or Pearl Harbor, but maybe it was as hectic too.
Normally I blame myself for a tendency to write too much. Now that almost in the entire world we are all confined at home I will succumb to my natural inclination. You’ve been warned this will be a long email. And I’ve added a lot of references so you can click on the hyperlinks if you want more.
Please send me your reactions and your opinions. We need to communicate more to keep us sane in these challenging times confined at home.
Like many agents and Brokers, I have my photo on my business card. If I had to pick a photo for my business card in 2020 I think this one would be a good contender.
This picture was taken on March 5th as I flew to Philadelphia for an exhibition. I counted less than 5 people with masks in Philadelphia and Miami Airports together. In international airports where everyone comes from everywhere, by definition. Then a nice person hold the door for you and then sneezes on you and it is already too late to ask him if he was coming from China or Italy. I was not going to take any chance.
Philadelphia is a historical city (at least compared to Miami) and they had an exhibition next to the one I was attending. The Flower Show in Philly exist since 1829 and is said to attract up to 260,000 people. I have seen myself this day thousands of very nice old ladies packed in conference rooms to learn more about roses, hydrangea and orchids. The only “safety” measure was a bottle of Purell at the entrance of each conference room. I really hope that all these nice old ladies will fare well during this pandemic.
I went to several real estate exhibitions in China 4 years ago. Since then I kept my eyes on this country and I followed on their own media this crisis. (I recommend this news website that kept me informed from the beginning: SCMP). So I ordered my mask, gloves and wipes in February knowing I will travel in March. Good call.
Now let’s talk briefly about where we were at the end of 2019. It is interesting to check these numbers, but it is abundantly clear that the past 4 weeks and the next 6 months will completely change the face of our real estate market, and quite surely the face of our economy as well.
After a remarkable high in 2014 at $478,450 the Median Price was sliding down to a low of $336,500 in 2018. That’s a 28.5% loss in value from the top of the market.
The amazing news of 2019 was that we stopped losing value, and we were actually bouncing back. Not like a huge bounce, but a confirmed progression quarter after quarter to get to $343,000 in 2019, which represent a 2% increase compared to 2018.
The evolution of the Median Price per Square Foot put us at a maximum of $480/sq.ft. in 2015, from where we slid to $409 in 2018. A 15% loss.
We bottomed out in 2018 at $409 and went up to $423 in 2019. A 3.4% increase.Not such a big number but a welcomed change in what was a difficult market for many years.
I’ve indicated the number of transactions per year but no significant information to observ there. The market is just less active in 2019 compared to 2012-2013.
Not so much information in this graphic but I wanted to confirm a hunch. It is becoming very difficult to sell at a high price at the Plaza. Beside the penthouses and even them went down a bit, the 2 bedrooms can’t go above $700,000 anymore.

That was the past. After a few weeks it appears already as a distant past. The market and the economy is drastically changing almost every day, and worldwide. These are unprecedented times.
In terms of real estate activity it has just been a brutal halt for 1 month. In these uncertain times very few people are looking to rent or buy. We did receive several requests from tenants facing financial hardships and looking for some relief in their rents. This is just starting.
Beyond the medical questions about this virus and how our normal life will adapt there is something certain already: we have started a gigantic recession that will stay in history. The numbers are climbing every day, and not in the right direction. More than 400,000 people just in Florida have lost their jobs. Some experts are forecasting a 20% unemployment level in the USA22 millions americans are recently unemployed.
The economy in South Florida will be particularly affected. Tourism is dead. The Cruise industry is nowhere to be seen for at least 6 months. Even if the confinement was eased on not so many people will really start traveling on a cruise ship.

The Service Industry is also decapitated. Many restaurants will not survive this, and will bring down with them their employees, but also their lenders and landlords. Hotels are closed. The Airline industry is already getting some subsidies but how long before we get back to the full planes and full airports that we had just in January. 

Trade is also affected. Shutting down the Chinese economy created numerous problems for the USA. The Chinese economy is facing their first contraction since 1976. The European Union is facing several issues as well. Where Germany and a few other nordic countries were able to fare quite well, the southern countries like ItalySpain, the UK and France saw countless problems and staggering amount of deaths.
So we have already started a recession, and a very serious one. Yes the stimulus checks for $1,200 are being paid as I write this, but the average rent in Miami is $1,700 so this will not even cover one month of rent, and certainly not in Brickell.
There will be many tenants unable to pay rent and that will affect the landlords as well. There will be also many owners who will lose their jobs, or who were already in a difficult situation and will have to sell.
This situation is international. Some owners will also face their own issues in their countries and may have to sell to generate some liquidities. The Real in Brazil is already facing some serious issues. The drop in oil prices is going to affect Mexico and of course VenezuelaRussia and the USA itself.
But as Warren Buffet said before a crisis is always rife with opportunities. To be honest I am not sure that Warren Buffet ever said that but he is a good candidate for such a saying. But it could have been Mark Cuban too.
We are in an election year. Normally an election year slows down the real estate market as many investors prefer to wait who will win before they invest. Far from me to predict who will win I would not be a real estate broker if I had this power.
However I can predict that massive amount of money will be injected in the economy to mitigate the recession and avoid a total collapse just before the November elections (debt and deficit be damned). I think that banks will be incentivised to loan money and they will have a surplus of liquidities that they will need to invest somewhere.

Since many small businesses will not survive this crisis banks will look for valid candidates for a home loan, or even for rental investments. When you get your funds at 0% then it is a no brainer to loan it at 3.5% to 4.0% with a real estate asset as collateral.

I will not venture in medical or political predictions. We may have to live with this virus for a few years, adapt ourselves to live with masks as they already do in South East Asia, and get regularly tested. We will see people taking your temperature at the airport or before entering a mall. We will see things that we didn’t expect in our normal american way of life. This I can’t say.

But what I can say in terms of real estate is that we will see many opportunities. Investors wish cash will grab great properties, lucky tenants with a job will get a mortgage and become first time buyers, and smart investors will leverage bank loans to build a portfolio of rental properties. This is what I am predicting.

The recession will not last forever. The fundamental of the economy even quite fragile were still good. With the amount of money injected in the economy and the probability of finding a cure or a vaccine against Covid-19 the economy will at one point start again, at least in the USA. In Europe the social net will help the unemployed to weather the storm but it will also delay the effects of the recession and pushback a return to normal. Crisis come faster in the USA but they leave quite fast too.

I will guesstimate a window of opportunity starting in 2 months (when we reopen the economy) and ending in 9 months. We will need 2 months to get out of the confinement and assess the reality of the economy. But in 9 months we will be getting to normal again and most of the opportunities will be sold by then. At least the great ones. People may think twice before splurging on luxury items like a cruise or a trip. But my take is that buying a home will come back faster than the other expenses, regardless of a V, U or L-shaped recovery.

Contact me and we will discuss that further. We need to get ready.

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