While there’s reason to believe that the residential market may not see its buyer numbers shrink as much as previously feared, the same evidently can’t be said for the commercial real estate sphere. A new post on Real Capital Analytics’ (RCA) Insights blog revealed that a rapidly thinning pool of buyers during the coronavirus pandemic may lead investors to quickly find the cycle’s price floor.
“Sale prices are a function of the depth of the market,” said Jim Costello, senior vice president at RCA. “The more easily one can bring an asset to market and engage in a competitive bidding process, all other factors equal, one can achieve a higher sale price. The striking feature of this downturn is how quickly this depth has eroded.”
In fact, Costello said, the number of unique active buyers in the U.S. commercial property market is shrinking faster during the COVID-19 crisis than it did during the Great Recession.
To illustrate this, RCA created a pair of indices, one based on the number of unique buyers in June 2007 and another based on the same figure for June 2019. During the 10-month period from June 2007 to April 2008, the size of the commercial buyer pool decreased 51%. As Costello explained, investors had gleaned by mid-2007 that something was wrong with the market, and a sense of caution built slowly as buyers fleed the scene at a consistent but relatively slow pace.
In contrast, the buyer pool this past April was already 77% smaller than it was in June 2019.
Consider, also, that the number of unique buyers during the last downturn bottomed out in February of 2009, five months after the September 2008 Lehman Brothers bankruptcy filing. But the number of unique buyers seen this past April 2020 is already proportionately close to that same level compared to where it was in June 2019.
Put simply: A comparable plunge in the buyer pool that took almost 20 months during the last downturn has been nearly equaled this year in half the time. Moreover, most of that epic drop has taken place in the last two months alone.
So what does that mean for property prices? Costello is quick to mention that it doesn’t necessarily mean that prices will continue to plummet.
“Economic fundamentals, the status of property income and investor perceptions of risk will drive the ultimate floor for prices,” Costello wrote. “Additionally, some aspect of the shrinking buyer pool is undoubtedly a feature of the fact that acquisition professionals cannot get on planes to visit with brokers and tour properties. Once travel and social distancing restrictions are lifted, some suppressed level of activity may rebound.”
Costello did caution that once those buyers re-enter the market, it’s likely they won’t be carrying as much optimism as they did before the coronavirus crisis. Still, the shocking pace of the buyer exodus appears more likely to define the speed of the price floor’s discovery, rather defining the price floor itself.
“The speed of the pullback in liquidity is likely to help investors find a floor for prices faster this cycle,” Costello said.
Read Costello’s entry on RCA’s blog here.