UPDATED, 10:05 p.m.: As the stock market saw its worst plunge since the coronavirus outbreak, real estate stocks fared no better.
Stocks continued their downward fall Monday, nearly a day after the Federal Reserve unleashed another rate cut and measures to prevent the economy from further spiraling as the coronavirus continues to spread across the United States.
The real estate sector was part of the turmoil, as a mass sell-off Monday morning triggered another circuit breaker that stopped trading temporarily — the third time this week. By market close, the Dow Jones Industrial Average had plummeted nearly 13 percent — almost 3,000 points — and the S&P 500 fell 12 percent, the worst drop since 1987. The Nasdaq also plummeted over 12 percent.
Real estate stocks, at least by one measure, appeared to fare worse than the broader market Monday. The FTSE Nareits All Reits Index, which tracks real estate investment trusts, nosedived 17.8 percent.
By midday Monday, infrastructure REITs appeared to be among the groups suffering the least, posting a decline of just 5.5 percent, according to Nareit. The worst-performing sector was hospitality — feeling the pain of cancelled bookings and events. Those stocks were down over 18.5 percent, according to Nareit.
Other real estate companies also were impacted. Realogy Holdings Corp. closed the day at $3.96 — a 28 percent drop and a record low for the residential brokerage conglomerate. CBRE dropped almost 17 percent, and Cushman & Wakefield’s stock fell 9.4 percent. Redfin, another residential brokerage, was down nearly 20 percent, and home builder Toll Brothers saw its stock plunge over 29 percent.
“I think it’s pretty clear we’re headed toward a contraction,” said Heidi Learner, chief economist at Savills.
The coronavirus, which causes the respiratory illness COVID-19, has led to over 6,500 deaths around the world. In the U.S., there are more than 3,500 cases. The pandemic has led states, including New York and New Jersey, to restrict public gatherings and shutter movie theaters, venues, casinos, and more. Restaurants and bars are only able to provide customers with takeout and delivery services.
Alexi Panagiotakopoulos, co-founder of Fundamental Income, sponsor of the NETLease Corporate Real Estate ETF, said it’s not just real estate that is impacted: It’s the entire market.
“The ripple effects are completely unknown,” he said. “It’s completely unprecedented in every sense of the word.”
In times of market volatility, investors typically would turn to defensive investments like REITs, which have built-in revenue from contractual rental obligations and are required to pay out 90 percent of taxable income to shareholders.
REITs “should typically exhibit less economic sensitivity,” said Michael Knott, managing director and head of U.S. REIT research at Green Street Advisors. “But in today’s world, there is no playbook for COVID, and you have extreme market upheaval and economic shock taking place.”
Prior to the sell-off, which began roughly a month ago, the fundamentals of the U.S. economy were strong, Panagiotakopoulos noted. Unemployment was low and banks were well capitalized. This means that as soon as people start leaving their homes again, markets could pick back up, he said.
But as companies force employees to work remotely, municipalities keep children out of school and governments ask people to practice “social distancing,” it’s clear commercial tenants will be impacted. Some REITs appear to have fallen almost in lock-step with some operating companies, in spite of those baked-in rent contracts, Panagiotakopoulos noted. He pointed to casino giant MGM, which recently shuttered its resorts and whose REIT has fallen staggeringly, along with MGM’s separate operating company.
“In my personal opinion those should not be one and the same,” he said.
The Federal Reserve Sunday evening slashed its benchmark interest rate to near zero — its second rate cut this month — and instituted a package of measures to boost credit and liquidity. After the Fed’s announcement, other central banks around the globe adopted similar measures to support financial markets.
Learner said the Fed’s actions suggest that the economic risks posed by the virus have increased — and it’s not necessarily clear that the rate cut will translate to lower borrowing rates for commercial real estate players.
“I think the jury is still out on how long the economic impact will continue and I think in large part that hinges on how long we see the health impact, these closures and this moratorium on travel,” Learner said.
Larry Kudlow, chief economic advisor to President Trump, said Monday that the White House will do “whatever it takes” to save the economy from the impacts of the coronavirus. On the table, he said, was a bailout deal for airlines, which have been hit hard by reductions in travel. Airlines reportedly were seeking a $50 billion deal from the government, which would be more than three times the amount of federal assistance the airlines received after the terrorist attacks of Sept. 11, 2001, the Wall Street Journal reported.
Knott, the Green Street analyst, said the Fed implemented significant monetary policy Sunday, but what’s needed is big fiscal policy — in other words, targeted stimulus to offset the macroeconomic shock taking place.
“The Fed is sort of fighting the last battle, and investors seem to be voting that the effort is futile and wasting its bazooka shots,” he said.
Read more on financial markets during the age of coronavirus
- Fed cuts interest rate to near zero, moves to prop up mortgage market
- Real estate stocks split into winners and losers after hectic week
- Coronavirus cases driving lenders to safer projects amid low interest rates
- Mortgage rates fall to record lows, but coronavirus could prompt slowdown
- Coronavirus fears slam real estate stocks amid massive selloff
That travel moratorium could be having another impact on real estate: It could make it harder for deals to get done, as people either can’t or won’t go see properties they might want to buy, Learner said.
For the first eight weeks of the year, European deal activity was down 18 percent from last year; it was down 50 percent for the Asia Pacific region, according to Real Capital Analytics. Deal activity in the Americas, where the virus has more recently seen a growth in COVID-19 cases, was up 10 percent, but RCA noted that deal activity for February is preliminary.
“Many of the networking events cancelled across the globe (such as MIPIM) have traditionally kicked off the sale processes and it remains to be seen how the curtailment of face-to-face meetings between brokers, buyers and lenders will impact transaction activity,” RCA said in a post Friday.
Keeping people home and stopping travel is triggering once-in-a-lifetime questions about the demand for some types of properties, Learner said. For instance, will stores exist without a physical footprint? Or will tourism return to its same levels as before the outbreak?
“I don’t think anyone really knows,” she said.
Write to Mary Diduch at [email protected]
UPDATE: This story has been updated to clarify that RCA’s February data is preliminary.