Pfizer announced that their Covid vaccine in trials was 90% effective at preventing infection. The stock market took off and traders began reshuffling their pandemic bets with Zoom down 20% and Disney, hotels, and cruise operators up substantially. Will there be a “Haven” reshuffle in real estate? What big risk did the vaccine just create for real estate and why? What does this vaccine mean for real estate values?
What was in the data?
A vaccine developed by Pfizer Inc. and BioNTech SE protects most people from Covid-19, according to a study whose early findings sent stock prices surging and were hailed by the top U.S. infectious-disease specialist as “extraordinary.”
The shot prevented more than 90% of symptomatic infections in the trial of tens of thousands of volunteers, the most encouraging scientific advance so far in the battle against the coronavirus. While the results are preliminary, they may pave the way for the companies to seek an emergency-use authorization if further research shows the vaccine is also safe.
The Stock market showed an immediate shift from “safe haven” assets
It is quite astounding to see how quickly the market is shifting out of safe assets. Zoom and Peloton have been large beneficiaries of the stay at home economy. Upon the announcement of the vaccine, Disney, Hilton, Carnival Cruise lines, airlines, and others were the new hot stocks rising substantially.
The quick reshuffling shows the market is pricing in a quick return to a more “normal” business environment with travel and businesses getting back into the office. Is the market correct that there will be a quick shift back into more traditional activities? Will real estate follow a similar shift away from haven assets?
What does this mean for real estate?
Unfortunately, real estate is not a liquid asset that investors quickly move in and out of like the stock market. Furthermore, real estate can’t adapt on a dime like a software company. For example, an office is not going to become an apartment building overnight to compensate for shifting demand.
Real Estate has experienced some fundamental changes over the last year that will take time to unwind, how “sticky” these changes are is the million-dollar question. Let’s look at a few sectors on the commercial side and some trends on the residential side to gauge the impact.
Commercial Real Estate
- Office: There will be a large reversal of the work from home trend. It might not be five days in the office, but will be substantially more than it is today. Even so, I still think large office campuses will struggle even with a vaccine. On the flip side, there will be a shift to smaller suburban locations to reduce risk of having a large quantity of employees in the same space. The office is not going away, it will just look a bit different than before.
- Light industrial: this sector will remain hot as companies will ensure they have more redundancy in supply chains and therefore will store more finished goods and parts to hedge against any future disruptions. Furthermore, the shift to online will further the demand for distribution and storage. Regardless of the vaccine, this sector will remain hot.
- Retail: The vaccine hastened a decline in retail that was already in the making. I don’s see a quick rebound in retail, especially big box and malls. The transition to online was accelerated by the pandemic and will likely hold as customers are more comfortable with buying everything from cars to tvs online. Retail brick and mortar will continue to struggle even with a vaccine
- Hospitality: Hotels should come back as people are ready to travel again and there is substantial pent up demand. Unfortunately, hotels will look quite different as a result of the pandemic. Business travel will continue to be substantially curtailed as many businesses learned how to adapt without the travel expenses. How much business travel comes back is the million dollar question.
Residential Real Estate
- Flight to Suburbia: The suburban exodus will likely slow considerably and there will be many residents (especially younger generations) ready to get back to the urban lifestyle and the amenities they have to offer. The city is definitely not dead and will quickly repopulate.
- Demand for Exurbia: I think the demand for further out rural locations has run its course, you will likely see price declines in these markets as the rush to remote locations will quickly reverse course.
- Hot destination locations: The pandemic brought a huge surge in demand for destination/resort locations from the Florida coast to Rocky Mountain ski areas. This trend will slow substantially in 21 and the “panic” to escape urban locations abates. I don’t see huge price declines in many areas as they are typically inventory constrained. A good example is Aspen, Colorado, this market went up over 40% due to the pandemic but there is basically zero inventory and many of the transactions were cash transactions. The vaccine will lead to a “flat” real estate market with not much movement on prices.
What is the biggest real estate risk on the horizon?
Although the pandemic drove many real estate choices over the last year, the biggest driver was (and continues to be) interest rates. As rates dropped, real estate became relatively less expensive and has led to the huge run up in prices.
As soon as the vaccine was announced, 10-year treasury yields rose substantially. Remember the federal reserve does not “set” rates, the market sets rates based on economic expectations. 30 year mortgages typically align with the 10 year treasury so as yields increase so do mortgage rates.
If the Covid vaccine proves effective and is widely distributed as planned this could lead to a big demand for goods and services that will drive the economy higher and raise future inflation expectations. Although these changes are good, the one downside is that borrowing rates will rise.
The current real estate market is driven by historically low interest rates. As rates rise, this will bring the current real estate party to a screeching halt with appreciation stopping on a dime. The million dollar question is how high rates will rise?
Summary
A prospective vaccine is great news for the country. I, like most of the country, am ready to get back to some sort of normalcy. Unfortunately in any economic change there will be winners and losers as the economy shifts from safe havens back into more traditional assets. As economic activity continues to grow with consumer confidence, rates will also rise. The current real estate market has been “juiced” by rock bottom rates for the last several years. What happens when we come off the sugar high will be the million dollar question, but there is no doubt that rising rates will end the party.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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