COVID-19 Series: A Broad Perspective | LIDA Construction

COVID-19 Series: A Broad Perspective


COVID-19’s rapid ascent to the centerpiece of attention across media channels and dinner tables on a global scale has caught many by surprise. Administrators are faced with the challenge of mitigating economic damage while coordinating a thoughtful and measured society-wide public health response. Such a task is certain to engender contention and dissonance. As responsible citizens, we can help “flatten the curve” by social distancing and adjusting our daily habits to minimize public interaction. These initiatives enable our healthcare system to appropriately manage inflows of critical care patients without overwhelming or unnecessarily burdening hospitals and medical personnel. We can also do our part by giving back to the community, which is why LIDA has partnered with 1Up Single Parent Resource Centre to donate a portion of all new contract sales through these tough times. If you are in a position to do so, please help contribute.

While the only known is the unknown, one thing is clear, that the coronavirus pandemic will have a discernable impact on the real estate industry. Foremost, let’s keep this pandemic in perspective. COVID-19 is the epitome of a short-term exogenous economic shock. It may last 3, 6, 12, or even 18-months, but a vaccine will come, a cure will come, and we will get through this. Take a deep breath, stay calm, and be thoughtful about how you can take advantage of this blip to grow and to introspect, as a professional or an individual. Humans are emotional beings, we tend to disproportionately focus on the short-term relative to the long-term, stay cognizant of this tendency as you seek to maintain your temperament. The circumstances of the COVID-19 pandemic necessitate a two-part bucketing of potential effects, short-term and long-term. The thoughts reflected below are speculative in nature and should be interpreted as such, these are largely unprecedented times and uncertainty is ubiquitous.

Short-Term, COVID-19.
a) Transaction volume may decline, potentially precipitously:

– As uncertainty looms, buyers and sellers are more likely to adopt a “wait-and-see” mentality, opting to postpone sales or purchases (residential and commercial).

– With heightened economic risk, credit markets can dry up and lenders will underwrite loans more conservatively. Credit liquidity will dissipate and consumer purchasing power will follow, in aggregate.

– A counterpoint here is that with interest rates lower, and likely to fall further, we may see more buyers step in and augment demand. However, risk premia will increase as banks price in an economic contraction. The net change in interest rates will be minimal.

b) Mortgage delinquencies (and tenant defaults) to increase:

– As unemployment spikes, some consumers will fail to meet their rent or mortgage obligations. The majority of Canadians live paycheck-to-paycheck.

– The federal government has intervened with fiscal stimulus, the extent to which this mitigates the shock is challenging to predict.

–  Delinquencies are inversely correlated with rent growth. As the rental market destabilizes, rent growth will falter and place downward pressure on real estate values.

– Will be offset, in part, by mortgage deferrals for those that are eligible.

c) Construction, leasing, and sales activity to slow:

– New permits and construction starts to decline as consumer sentiment diminishes and COVID-19 mitigation efforts take center stage.

– Tenants are less likely to move amid growing uncertainty, bolstering retention rates but dragging down leasing velocity at new developments.

– Most obvious, home showings and new sales will be virtual, digitizing the purchase and sale process.

d) Disproportionate adverse effects on affordable and Class B/C residential housing:

– Impact on lower socioeconomic rungs to be magnified with higher probability of unemployment and lesser relative savings.

– Federal stimulus to cushion blow; protraction of social distancing will be a key indicator in distilling magnitude of shock.

Long-Term, COVID-19.
a) A new era of conservatism:

– After a relatively prosperous decade-long run of robust economic growth coupled with near record low unemployment rates, the blow of COVID-19 will taper consumer and business optimism – tempering risk-taking behavior.

– Near-term biases will encourage more “emergency” savings and breed caution in investment and new business growth initiatives.

– Leverage will decrease. Businesses and consumers will be more attune to the adverse effects of leverage, not just its benefits of enhancing purchasing power and ROI. We may see a secular shift to lower Loan-to-Value ratios on real estate investments with greater emphasis on cash flow and debt service.

b) Work-from-home to become increasingly prevalent:

– The current work-from-home (WFH) involuntary trial period may result in an increased desire for employees to WFH after experiencing some of its benefits.

– Would likely result in a reduction of corporate office space and an intensified adoption of video conferencing or other WFH-esque services.

– Conversely, employees and employers may become more attune to the benefits of in-office meetings and social dynamics.

– In aggregate, we may see a secular shift toward a hybrid WFH/in-office model in the long-run.

– Quality of life and well-being initiatives to become increasingly important. Access to nature or community activities may be met with an increase in demand.

c) COVID-19 will push the real estate sector to innovate and evolve:

– The real estate sector has lagged other industries in the adoption of disruptive technology and R&D capital investment.

– The digitization of the industry was well underway with the launch of digital home buying and digital brokerages, COVID-19 is likely to propel that momentum. Entrepreneurs will look for other ways to streamline efficiencies and innovate.

– As consumer sentiment and consumption preferences shift, space optimization and design in the built environment will need to adapt. For instance, will in-home gyms become more common? Dense, urban populations could become less attractive and the trend to urbanization may see a reversal or a slowdown.

While some of the above-mentioned generalizations are seemingly inevitable, others are less clear. The key in the bedlam that is the COVID-19 pandemic is government intervention. The pandemic calls for effective and decisive fiscal stimulus from the federal government. The eventual protraction and magnitude of an imminent economic recession (or depression) largely rests on the efficacy of such stimulus.

Construction remains an essential business in Greater Victoria. The LIDA Team is here to service your needs, please feel free to contact us with any questions you may have.

Stay positive, stay vigilant, and stay safe.

One of the greatest learning experiences of our lifetime is upon us.

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