The Outlook for REITs During the COVID-19 Crisis
May 22, 2020 | Calvin Schnure | Nareit
The social distancing measures designed to slow the spread of COVID-19 resulted in a sudden and near-complete shutdown of many businesses across the economy. Many of these businesses may struggle to pay their rent in the months ahead, resulting in cash flow difficulties for many landlords. In addition, since late March, tens of millions of workers have lost their jobs, causing the unemployment rate to spike higher, toward levels not seen since the Great Depression.
The sharp deterioration of business conditions will have negative impacts on commercial real estate markets and REITs. Indeed, demand for leased space weakened in the first quarter of this year, even though the crisis only intensified in the final weeks of the quarter. Conditions will likely continue to worsen in the months ahead, until the economy can begin resuming more normal operations.
The impact of the social distancing and business closures varies widely across real estate and REIT sectors, and for some, the effects are severe. Others, however, are less directly affected by the crisis. REIT stock market performance since the crisis began reflects both the magnitude of these risks and also the differences across property types. The REIT sector overall entered this period, however, from a stronger position than in previous market downturns, in terms of operational performance, balance sheet strength and sources of liquidity available for the potentially lean months ahead. This financial strength provides support for the medium- and long-term outlook for investing in REITs.
