COVID-19 Shakes Real Estate Sentiment

Commercial real estate occupier and investor sentiments moved into negative territory in both the U.S. and Canada, the Association for International Real Estate Investors and the Royal Institution of Chartered Surveyors reported.

The first quarter AFIRE/RICS North America Commercial Property Monitor showed the COVID-19 pandemic is exerting a “significant impact” on the real estate market. Concerns about the outlook for the economy appear both in a sharp drop in tenant-demand indicators and in expectations regarding the outlook for rents.

“Occupiers are already asking for rent reductions,” one survey respondent said. “While the results may be similar to the 2008 financial recession, the effects will create drastic long-term changes in the office and retail markets,” another predicted.

AFIRE/RICS also asked about respondents’ expectations for the next year. Three months ago, respondents said they expected to see modestly increasing capital values. But in the new survey respondents predicted values could decline 5 or more percent over the next 12 months. “Significantly, the only sectors bucking the negative trend for now…are prime industrial and multifamily,” the report said. “The decline in retail is now projected to be particularly severe, particularly in the secondary space.”

Perceptions about where markets stand in the property cycle also turned decidedly negative. For the U.S., the proportion of people who consider real estate in a downturn jumped from 17 percent last quarter to 75 percent currently. In Canada, the downturn number is just over half. Most say credit conditions are deteriorating, although the survey suggested this sentiment is more marked in the U.S. than in Canada, the report said.

“Reflecting this [sentiment deterioration], international investors appear to have responded to the current environment by turning a little more defensive,” the report said.