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Coronavirus Impact on CRE Expected to Be Short-Term and Limited

National  + Weekender  | 

By Paul Bubny

With more than 2,700 participants registering for CBRE’s flash call Thursday on the commercial real estate implications of the coronavirus disease 2019 (COVID-19), the subject is clearly top of mind for the industry. (As a case in point, another major services firm, Cushman & Wakefield, pulled out of participating in this year’s MIPIM conference in Cannes due to concerns about the virus.)

Beyond the human impact, though, the coronavirus—which has spread to some 40 countries and has cost more than 2,600 lives to date—will have an effect on business generally and CRE in particular, in the U.S. and abroad, CBRE’s experts agreed. However, that effect is expected to be short-term and limited primarily to a few sectors, mainly travel and retail.

On Thursday’s call, Henry Chin, CBRE’s head of Asia Pacific research, said the coronavirus is “putting some downside risk on global economic growth,” especially in China. Yet Chin expects the economic impact to be confined largely to the first half of 2020, assuming that the situation is brought under control and does not escalate significantly in major cities. Full-year GDP estimates for China have been cut by 50 basis points, though.

In the U.S., Spencer Levy, chairman of Americas research, said that he and the Federal Reserve’s regional governors were “all in the same place where we haven’t adjusted our forecast for GDP” due to coronavirus impact.

The likelihood of an interest rate reduction or two, on the other hand, has increased as a result of the virus, possibly as soon as next month’s meeting of the Federal Open Market Committee. That being said, Levy noted that the Fed is “very data-driven” and therefore unlikely to pull the trigger on a rate reduction without data supporting it.

With Chinese tourists representing about 70% of overseas visitors to the U.S. and generating 16% of the tourism spend, the curtailment of travel to the U.S. will have an impact on the hotel sector. Yet, Levy said he expects that impact to be confined to a few major markets which customarily draw large numbers of Chinese visitors, such as New York and Washington, D.C.

Imports to the U.S. from China, and U.S. exports to that country, are likely to see an impact from COVID-19. However, Levy noted that these represent a relatively small segment of the domestic economy.

The coronavirus also came up as a topic of conversation at other industry events. “Industrial and hospitality are the two asset classes most at risk with this particular situation going on with the coronavirus,” said Anthony Graziano, CEO at IRR during Connect South Florida in Miami Feb. 26. “I think the supply chain has already been disrupted, but I don’t think we’re going to feel it for another two to four months. You will feel it in the industrial this year, though.”

At the same conference, Willis Towers Watson’s Fred Zutel cited the potential for local market impact. “What is really important to talk about (when talking about coronavirus) is how this is going to affect our economy here,” said Zutel, head of corporate risk & broking at Willis Towers Watson. “During the Zika virus epidemic in 2015-16, there were significant claims and claims activity from folks that decided they didn’t want to travel to Miami and cancelled plans. It resulted in tremendous booking cancellations at Class A hotels up and down the beach. So insurance companies excluded claims like that on all of their policies going forward.

“What we’re seeing now is a lot of big real estate and hospitality accounts, thanks to the insurance market, are now staring down a situation where they could have a potentially catastrophic cancellation situation except that now their policies exclude this type of loss,” he added. “So now the loss is out of their pocket instead of insurance policies.”

Taking the potential impact to an even more local level—the risk at individual properties—Metro Services’ Michael Oddo told Connect Media, “With many of our clients engaged in business all over the world, the first risk comes from their employees returning from overseas travel. Some of our clients are already suggesting to their staff that have traveled that they work from home. Transportation hubs, airplanes, subway systems, buses, trains etc. all offer increased risk due to the closed confines.”

In office environments, “Many companies have more people occupying large common spaces with more people crammed in per square foot than ever before,” said Oddo, whose company provides facilities maintenance services for a broad range of property types. “Additionally, there is a lot of freedom of movement in modern offices and shared spaces such as private sitting areas that a dozen different people might bring their laptop to and sit in and work over the course of a day.

“Presently, according to the United States Centers for Disease Control and Prevention (CDC), current understanding about how the virus that causes coronavirus disease 2019 spreads is largely based on what is known about similar coronaviruses,” he continued. “Therefore, the main way the disease spreads is through respiratory droplets expelled by someone who is coughing. The risk of catching COVID-19 from someone with no symptoms at all is very low, according to the World Health Organization.”

Office buildings and other public and private facilities present hazard points for potential transmission of the virus: “areas such as restrooms, food preparation areas and high-touch surfaces,” said Oddo. “These areas are known to have the greatest likelihood of potential environmental contamination. The focus high-touch surfaces may include door handles, handrails, light switches, sinks, faucets, elevator buttons, desks, armchairs, etc.”

Accordingly, Oddo said, “Some clients have asked for increased cleaning frequencies, particularly in restrooms, elevators, conference rooms, kitchens or any other areas where there is increased employee interaction. We’ve also provided high-efficiency detail disinfectant protocols where requested. A recommendation from the CDC that we highly encourage the buildings/tenants to practice is having good hand hygiene and we recommend that our clients and their tenants follow additional procedures and alerts issued by the CDC and that they alert us and the CDC if they believe they have a potential exposure case.”

In general, “The biggest short-term impact is on sentiment,” both consumer and business, Levy said on Thursday’s flash call. However, he reminded attendees that two other near-term crises—the SARS epidemic in 2003 and the immediate fallout from the Brexit referendum in 2016—led to “significant bounce-back” later on in terms of economic recovery. The impact of COVID-19 on sentiment isn’t expected to be any different this time.

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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