Executive Summary

• Interest rates cut to zero: The Federal Reserve cut short-term interest rates by 100 basis points (bps) yesterday to a target range of 0% to 0.25%.
• Quantitative easing to keep the cost of credit down: The Fed announced asset purchases of $500 billion in Treasury securities and $200 billion in mortgage-backed securities starting today.
• Domestic liquidity support to keep credit flowing: The Fed cut the discount rate that it charges banks for short-term loans during times of strain by 150 bps to 0.25%. Bank reserve requirements were cut to zero.
• Global liquidity support: To ensure that dollar-based transactions outside the U.S. can be completed, including loan payments, U.S. dollar swap lines were adjusted with four foreign central banks.
• Increased government spending: The House of Representatives passed a bill negotiated with the Trump administration late last week to address the immediate impacts of the pandemic-induced crisis on citizens. The Senate is still reviewing this legislation but is expected to pass it. Additional fiscal action is expected to address industry-specific issues and the broader economy during the coming weeks.
• CBRE will conduct a Flash Call on March 18 at 11 a.m. EDT to discuss COVID-19’s potential impacts on the commercial real estate industry. To register for the call, go here.

Rapidly Evolving Conditions

The Fed responded on Sunday to the deteriorating economic outlook and market disruptions from the COVID-19 pandemic. Emergency moves included cutting short-term interest rates to a target range of 0% to 0.25%, restarting purchases of government and mortgage-backed securities (quantitative easing) and ensuring the availability of dollars to foreign central banks (including Canada, the U.K., the European Union and Switzerland) via enhanced swap lines.

In addition, the Fed encouraged financial institutions to use intraday credit facilities and capital and liquidity buffers—built up after the Global Financial Crisis—to aid prudent lending to households and businesses during this time of economic strain. Reserve requirements were also cut to zero, substantially boosting commercial banks’ ability to lend. The Fed’s actions are on a par with those enacted during the financial crisis and have been more rapidly deployed.

Implications for CRE

Lending to commercial real estate has notably tightened in the past seven days. Prior to the crisis, lending markets had been deep and liquid. But as conditions worsened, spreads widened and some lenders and borrowers paused their activity. These measures are helpful, but it is unlikely that real estate lending conditions will ease until the extent of the virus outbreak is clearer and relatively under control.

The COVID-19 outbreak is a serious shock to the U.S. economy as it affects both supply and demand. There will be a sharp drop in economic activity in Q2, including a drop in the values of commercial and residential real estate. As early as Q3 2020, as the virus begins to peak, activity and values will begin to stabilize. A recovery is expected to be underway by Q4, but the impact on the economy and corresponding property values in some sectors will last well into 2021.

Hotels: Additional travel bans imposed by the private and public sectors are severely limiting travel and, by extension, demand for hotels. CBRE forecasts that the hotel sector will suffer a 20% drop in revenue this year, with additional downward revisions likely. Effects from less-favorable economic dynamics will last for months after the spread of the virus slows.

Industrial: Simultaneous supply and demand shocks—supply-chain disruptions and less demand due to an economic slowdown—will impact industrial properties. This will be counterbalanced by more people shopping for goods online, which likely will bolster demand for last-mile distribution space.

Retail: Bans on various gatherings and restrictions on retail sites, including food & beverage establishments, have already materially lowered consumption, especially in high-traffic properties like malls. Some retailers have announced voluntary temporary closures, but government directives may force more. Though some retailers, such as grocers and pharmacies, are having trouble keeping up with brisk demand, weaker economic activity will negatively impact overall retail fundamentals. This will compound difficulties for certain retailers that are already struggling. When the virus eases, pent-up demand should provide a strong surge in activity.

Office: Slowing economic growth will put leasing on hold, pushing up vacancy. This is particularly true for travel and oil & gas industries. Some pent-up demand likely will materialize later in the year. Longer term, the crisis will accelerate the trend toward workplace fluidity. For more details, see CBRE’s Real Estate 2030 Research Report.

Multifamily: Overall, structural shifts in demand remain favorable for the sector. However, issues of affordability and reduced household formation will weigh on demand in the next six months. Tenants will gain the upper hand in lease negotiations. During the near term, supply issues are hampering construction of new units and, in some cases, adding costs to new development.

The Bottom Line

The U.S. economy and commercial property market fundamentals were on firm footing coming into this unprecedented period. As more aggressive measures are taken to slow COVID-19’s spread, economic impacts will increase. This will result in negative GDP growth during the second quarter. CBRE has lowered its estimate of full-year growth to 1.3%, with risks biased to the downside. Property values and activity will take a short-term hit, but there is no reason to think that the effects on values will last long.

The government’s next fiscal response will range in the hundreds of billions of dollars to address businesses particularly affected by the crisis, such as airlines and small businesses, as well as additional measures to shore up the consumer. Policymakers retain a wide range of options and will act aggressively, especially because this is an election year. For this reason, the most extreme impacts on commercial real estate likely will be somewhat short-lived.