We are living in completely unprecedented times with the rise of Coronavirus (CoVid-19) across the world. Not since the Depression (or, for those who have survived Communism in Eastern Bloc countries) have our grocery stores been stripped bare of essential items for weeks at a time. Never have our highways, airports and train stations been empty, with commerce grinding to a halt. Never have restaurants, ski areas, gymnasiums, schools, colleges, churches and all public gatherings been shut down for weeks at a time.
The restaurant and hospitality industries are getting hammered like never before, and there may be no relief in sight. Gas prices are at unbelievable lows, and the American oil and gas industry is suffering like never before. Even beef prices, in some markets, have dropped 30%, which means that many farmers and ranchers are operating at a significant deficit.
Despite any interventions from the government, such as checks mailed to taxpayers and banks offering to suspend payments for a couple of months, the effects of this pandemic will be massive and all-encompassing. The question is, how will CoVid-19 affect real estate, and for how long?
The answer is, it will be significant and far-reaching. There are factors that have never been contemplated before. For example, if you have elderly sellers who need to move to an assisted-living home, might they be much better off to just stay where they are, rather than being exposed to a virulent situation? And what about having dozens of people from all over the country trooping through the home, potentially bringing an infectious disease to vulnerable people? One of my sellers, a man in his 70s who is also a smoker, just declined to sign a listing contract for that very reason, and I can’t argue with his logic. In fact, several large MLS systems have shut down property showings until further notice. How many millions of transactions are being delayed for these reasons? After all, not many buyers will make an offer on a property that they haven’t even seen.
Even so-called “recession-proof” real estate is suffering. One of our clients has several rental properties in Gunnison, which are popular rentals for college students. Since all classes were canceled for the remainder of the semester, the students packed up, moved out and went home, refusing to pay the balance of their leases.
Even if sellers do get a contract on a property and want to move, the mechanics of moving are infinitely more complicated. Will the movers show up? Are the buyers and sellers at risk of contracting the disease while they’re in transit? How does a title company handle a closing? Remotely, or in person?
Then there is the issue of pricing. Some economists predict a 20% unemployment rate and a 30% drop in gross domestic product. Think of all the waitresses, bartenders, ski instructors, hospitality industry personnel and oilfield workers who are no longer drawing a paycheck. Without the ability of buyers and sellers to move freely to see properties and with many families “sheltering in place,” residential real estate is at a standstill. With no income being derived from many commercial properties, their value has become stagnant at best, and worthless in the worst-case scenario, because commercial properties sell on one factor: income.
With real estate sales basically at a standstill, prices have nowhere to go but down. Sales volume will decrease dramatically. Frankly, many Realtors will have to look for new sources of income. When you consider that there are 117 brokers and agents in just the Delta County MLS, and about 40,000 agents and brokers in Colorado, one wonders how all those folks will make a living.
I was recently on a conference call with Dr. Mark Dotzour, Professor Emeritus in Real Estate Studies from Texas A&M. He laid out scenarios and predictions for several areas of real estate. Here are some takeaways:
· Recreational ranches: this market will soften dramatically, as the buyer pool has dried up. Trial lawyers had their fees curtailed, and the same with doctors, eliminating many buyers. Oil and gas people are hurting, and the feeling is that this group would rather be selling discretionary properties rather than buying. Sellers should get very realistic on pricing, and buyers will have their choice of properties.
· Transitional land: investors who have pulled their money from the markets are looking for a place to go with their money, and traditionally, those farm properties that stand in the path of development have high long-term potential and they can still be operated as income-producing farm properties with low tax burdens in the meanwhile. These properties can be seen as a safe haven in this volatile market cycle.
· Residential real estate is suffering now with an inability to show and transact properties, but demand will be pent-up for the short to medium term. Mortgage rates usually trade at around 1.75% above the prime rate, currently at 1%, so people are flocking to re-finance and looking for 2.75% rates. Lenders experienced such a crush of people looking to re-fi even at 4% and were getting it, so they’ve kept the rates higher than normal at around 4% or even close to 5% and they’re still busy. In a couple of months, after the virus scare goes away, there will be a lot of activity in residential real estate due to super-low interest rates. There will be volatility in the residential market as more borrowers are not able to make their payments, even with banks forgiving several months of payments. Foreclosures will necessarily rise and prices may fall.
· Farmland: commodity prices are still bouncing off the bottom and farmers who have a high debt load against their property are going to have a tough time. There may be foreclosures on the horizon. However, farmland is still an attractive investment because it’s a safe haven in very volatile times. It’s inconceivable that commodity prices can go much lower than they already are, and at least investors can expect a 2-3% return on their money. In order to sell, farmland must be priced attractively and at market values. “Pie in the sky” pricing is a thing of the past.
· Commercial property: restaurants and hospitality properties will suffer as long as CoVid-19 is with us. Many business owners will go bankrupt, and lease rates will suffer. Apartment rents may go on holiday for a few months, and certain properties that were formerly profitable will suddenly become a drain on assets. Mini-storage units, office buildings, and development land look to be good investments.
I’ve consulted with several top brokers and investors around Western Colorado for their opinions on what comes next. The consensus is that this truly is a “black swan” event, one where a crisis cannot be anticipated or planned for, with catastrophic consequences. It will take us at least eight to 10 months to dig ourselves back out of a very deep hole. CoVid-19 has caused a disruption at least as significant as the Great Recession of 2008, but in some ways, it looks a lot more positive on the way out. We have far better leadership than we did in 2008, with an administration that understands markets from a business perspective.
My personal opinion is that we have many properties that will look attractive to city-bound buyers who are sitting at home looking at real estate while they can’t go to work. The country home on 5 acres with a big vegetable garden; the horse property with access to riding trails; the riverfront property with a rushing stream; the farm with senior water rights — these will still attract buyers if they’re well marketed and priced properly. Vacant properties that can be easily shown will be easier to sell than occupied properties. Mountain cabins should have a special appeal.
This market will separate the men from the boys as far as sellers are concerned. Anyone who has a property to sell should get very, very serious about their intentions and willingness to sell. Those who keep pricing unrealistically high are wasting their time, and special consideration should be given to offering owner financing and reasonable terms. Well maintained, clean, tidy properties will still have willing buyers.
Gary Hubbell, ALC, is an Accredited Land Consultant and managing broker and auctioneer with United Country Colorado Brokers and Auctioneers. Based in Hotchkiss, Gary is licensed in Colorado and Utah, and sells ranches, farms, orchards and vineyards, country homes, mountain cabins and land, and hunting properties. He also sells homes in town. You can reach him through his website, uccoloradobrokers.com.