CORONAVIRUS OUTBREAK: IMPLICATIONS FOR REAL ESTATE
Interest Rates Hit All-Time Low as Spread of Coronavirus Sparks Flight to Safety
Stock market volatility showcases real estate stability and yields. While the stock market was particularly robust last year, with the S&P 500 delivering total returns exceeding 25 percent, equities recorded a major correction that erased a significant portion of the gains. In the ensuing flight to safety, long-term Treasury rates dropped to a record low, offering real estate investors an exceptionally low cost of capital and some of the highest levered returns in 30 years. Strong capital market liquidity and sound underlying real estate space demand remain pillars of support for commercial real estate.
Uncertainty drives interest rates to record low. The spread of the new coronavirus (COVID-19) beyond the borders of China quickly disrupted the financial markets. Investors, focusing on the downside risk potential of the outbreak, drove significant capital to the safety of the bond market, pushing the 10-year Treasury rate to an all-time low while driving the S&P 500 down by 11.5 percent in the last week of February, the largest one-week stock market drop since the financial crisis. Given the nature of this fast-paced correction financial markets will likely remain extremely fluid until confidence is reestablished.
Sturdy economy withstands headwinds. While the coronavirus will weigh on the U.S. economy in the first quarter, a recession is not imminent. Expectations of weaker exports, reduced tourism and supply chain-related shortfalls will moderate the pace of economic growth, but low unemployment and comparatively strong consumption levels should off set the headwinds unless the outbreak amplifies significantly or confidence levels drop dramatically. Empowered by low inflation, the Federal Reserve delivered a surprise rate cut on March 3 in an eff ort to reinforce the economy. Although Wall Street already expected a 50-basis-point cut at the Fed’s March 17 meeting, the Fed adjustment sparked an additional decline in the 10-year Treasury rate.