How Pandemics like COVID-19 infect Real Estate

This article addresses (1): The origins of COVID-19, “Wet Markets”, and the Chinese sale of Wildlife; (2) Chinese buyers are hot, but how about for Florida?; (3) Cultural differences about using masks; (4) Becoming today’s 2020 Virtual Realtor; (5) Mortgage rates bottom to lowest in 49 years; (6) HELOCs as an alternative to fix up homes; (7) Lack of inventory and new construction; (8) Can COVID-19 Survive on Imported Products/Goods/Building Supplies?; (9) Litmus Test of Looking at Retail Stores in Airports; (10) Other Brick and Mortar Retailers/Tenants; (11) Triggering Insurance Coverage; and (12) Real Estate Stocks.

Origins of COVID-19, “Wet Markets”, and Chinese sale of Wildlife. This is not the first time the world encountered a pandemic or a coronavirus. For instance, the phrase “Avoid it like the plague!” dates back to the 14th Century bubonic plague which swept Asia, Europe, and Africa up in the “Black Death” killing an estimated 50 million people.

Coronaviruses are named for the spikes protruding from their surface which resemble a crown. In 2003, a coronavirus called SARS-coV (Severe Acute Respiratory Syndrome) emerged from Civet Cats in a wet market in southern Foshan, China. In 2012, a coronavirus called MERS-coV (Middle East Respiratory Syndrome) emerged from camels in Saudi Arabia.[1] Diseases derive from animals to wit: Plague (fleas); Influenza (birds, pigs); HIV (chimpanzees), EBOLA (fruit bats); ZIKA (Mosquitoes); MERS-coV (Camels); SARS-coV (Civet Cats); and COVID-19 (Bat to Pangolin).

Doctors traced COVID-19 (the nickname for Coronavirus disease 2019) to a “wet market” in Wuhan, China. Wet markets are a market where live animals are slaughtered and sold for consumption. In Wuhan, cages and cages of animals were lined up in rows and then stacked one-over-another. As the waterfall of animal urine, blood, vomit, and excrement soaked each of the ensuing caged animals from the animals above, conditions became exponentially unsanitary allowing viruses to brew and fester.

In the 1970’s, communist China which controlled all food production, faced famine and was unable to feed all its people. In 1978 China gave up control, allowing private farming. Big companies focused on staples like beef, poultry, and pork production. Smaller farmers however focused on wild animals like snakes, bats, turtles, ostrich mouse, bear, peacock, alligator, duck, fox, civet cats, tiger, rhinoceros, camel, and pangolin. In 2018 the wild-life market was estimated at ¥148 Billion Yuan (equivalent to $21.3 Billion US dollars) and exerted tremendous lobbying power in China to stay open. The wildlife food industry shifted marketing strategies to promote wildlife animals as tonics, body-building, sex enhancing, and disease fighting. Notably, the majority of Chinese do not eat wildlife animals. China has since shut down thousands of wet markets and temporarily banned wildlife trade. Unlike in the past, Chines social media is now available and is pressuring the government to make the ban on wildlife sales permanent. [2]

Chinese buyers are hot, but how about for Florida? For seven (7) consecutive years, since 2013, China has been the largest foreign buyer in the U.S. in terms of total dollars spent of residential property: (2013 $12.8B); (2014 $22B); (2015 $28.1B); (2016 $27.3B); (2017 $31.7B); (2018 $30.4B); and (2019 $13.4B). For five (5) consecutive years, since 2015, China has also been the largest foreign buyer in the U.S. in terms of total number of purchases of residential property: (2015 33,807); (2016 29,195); (2017 40,572); (2018 40,372); and (2019 19,900). For Seven (7) consecutive years (excepting 2017) the average purchase price paid by Chinese buyers in the U.S. has also been the highest (2012 $484K) (2013 $556K); (2014 $590K); (2015 $832K); (2016 $937K); (2018 $753K); and (2019 $675K). However, even though Florida has consistently dominated the U.S. market as a major destination for all foreign buyers (e.g. Canada, UK, India, Brazil, etc…) since 2009; only 4% of Chinese buyers are buying in Florida, with the lion share of 34% of Chinese buyers purchasing in California. But before snubbing 4% off, that would translate into over $53 Million in Florida residential sales in 2019, and nearly half of all Chinese purchases were all-cash. [3]

Cultural Differences in Using Masks. In the U.S. when you see someone with a facemask you think they’re sick. But in China, the understanding is that people wear facemasks to avoid getting infected by others.

Becoming Today’s 2020 Virtual Realtor. Today, just about every part of a real estate transaction can be accomplished virtually. Realtors may expect reaction to be strongest among sellers, who worry about strangers entering their homes. Realtors have been giving property tours through WhatsApp, Facetime, and other video conferencing phone apps.   When listing properties, realtors may want to consider three-dimensionally scanning homes, so buyers may virtually tour homes without having to congregate in an open house. My favorite technology is offered by Matterport which amazingly uses 360 degree cameras to turn a space into an accurate and immersive digital doll house that gives the real feel of being right inside the property. The program also allows you to click and drag to accurately take measurements for furniture placement. Contracts can be signed through DocuSign, money can be transferred through wires, and effective January 1, 2020 we are even capable of having all of a buyer’s and seller’s documents signed and notarized using simultaneous online audio and video technology through our specially licensed Remote Online Notaries.

Mortgage Rates Bottom to Lowest in 49 Years. Lower rates mean more buying power for those already motivated in the market looking to buy. Lower rates will also entice previously unmotivated new buyers who have been hesitantly sitting-on-the-fence to jump at the opportunity for FOMO (Fear of Missing Out). In early March we saw the 30-year-fixed mortgage rate fall to 3.29%, which is the lowest rate in history since Freddie Mac started tracking such rates in 1971. Similarly, the 15-year fixed hit 2.79%, which is also the lowest rate in history since Freddie Mac started tracking that rate in 1991. The central bank noted that the move was in response to the “evolving risks” the COVID-19 outbreak poses to the economy.[4] Mortgage applications are up, the industry is on a mortgage broker hiring spree, and it anticipates capturing refinances to save owners several thousands of dollars in lower monthly payments. Big banks are shifting staff to help support the influx of mortgage applications. Refinances could stimulate the economy because consumers will have more money in their pockets to spend. Although some experts predict 30-year-fixed rates may drop further to 3.0%, how much more do they really need to drop considering the current low rates already accomplished the goal of creating a boom to refinances, and despite homebuyer interest it doesn’t change the fact that there is a shortage of homes for sale? As a result, lenders don’t need to give Americans much more incentive to apply for new home loans.

HELOCs as an Alternative to Fixing Homes. As an alternative to refinancing, one thing to suggest are HELOCs (or Home Equity Lines of Credit). Although falling in popularity, the rates on HELOCs from lenders are going to be so tempting, especially for people wanting to fix-up homes and take out temporary but modest loans.

Lack of Inventory and New Construction. Generally, as mortgage rate drop, home sales rise. However, the major problem is the supply of homes being offered for sale remains at historic lows. No matter how much a buyer wants, there are not enough homes on the market for sale to buy. Therefore, regardless of how good the rates are, prices from sellers may remain unaffordable. But the lack of inventory of re-sales, should promote growth in construction of new homes to relieve the strain of low inventory. Focus on pre-construction contracts for new developments. While “pending contracts” are not completed contracts, it is an indicator of future housing trends. The concern however is that developers will suffer from building supply shortages such as lighting, appliances, flooring etc., which will lead to higher construction costs, defaults, and delays in finding alternate suppliers.

Can COVID-19 Survive on Imported Products/Goods/Building Supplies? COVID-19 seems to behave like other coronaviruses with studies suggesting that it may persist on surfaces for a few hours or several days, which may vary under different conditions (e.g. type of surface, temperature or humidity of the environment).[5] A study of other coronaviruses found they remained on metal, glass and plastic for up to nine (9) days.[6],[7]

Litmus Test of Looking at Retail Stores in Airports. Declining foot traffic in terminals flying to Asia have seen sales slump by as much as 50% (JFK); 20% (LAX); 15% (SFO); and in terminals inside of Asia like Hong Kong, Singapore, and Thailand, as much as 70%; causing some major airport authorities to offer rent relief for several months.[8]

Other Brick and Mortar Retailers/Tenants. As if the one-two punch of increasing competition with online stores and sagging attendance at malls couldn’t get worse, retailers in shopping centers are now dealing with the inability to get supplies from Asia, plus declining sales, as consumers opt to avoid mass public places. COVID-19 could push buyers out of public malls and even further into the reclusiveness of e-shopping. In the heat of tenants demanding rent abatements, reductions, and less hours, the Singapore government offered a 15% property tax rebate to landlords. Tenants here in the U.S. may wish to look closely at their lease agreements force majeure (or acts of god) clauses very closely, as a diving board for discussions with their landlords.

Steps Taken by Landlords and Convention Centers. Several major office landlords are stepping up efforts to keep buildings clean and sanitary by disinfecting frequently touched surfaces such as: tabletops, doorknobs/handles, and elevator buttons; and installing hand-sanitizing dispensers at entryways, lobbies, and throughout buildings. A number of conferences and events have been cancelled. In China, landlords are offering discounts to tenants who sign long-term contracts.

Employer Response to COVID-19: Companies have shut factories, canceled conferences, drastically scaled back non-essential employee travel, required self-quarantine upon return, held board meetings via mass video conferencing, allowed employees to work remotely, bolstered IT, focused on keeping “critical operations” running, instituted layoffs, and have been curious about how to address the infectious disease with suspected employees in light of HIPPA. In major cities, employers are paying for taxis to have employees avoid public transportation like buses, trains and subways. JP Morgan Chase allowed 12,000 employees to work remotely which has the added benefit of testing their communications in the event of widespread disruption.

COVID-19 as a Contractual Defense. Health and safety of clients and staff are a priority. Therefore, the legal defenses of act of god, force majeur, impossibility, and commercial frustration are certainly going to be tested as cancellations, terminations, and non-performance of contractual obligations mount.

Triggering Insurance Coverage. Others may look to the wording of their insurance policies for coverage. Business Interruption coverage could be triggered if a disease’s outbreak at an insured location results in people choosing not to patronize a business. Previously coverage was found for cases of SARs, bird flu, and Zika, but again that was based on the specific wording of the policy. Trade disruption insurance (TDI) focuses on loss of earnings, extra expenses and contractual penalties incurred as a result of delays or disruptions in trade. Employees traveling on business into infected areas or those stationed permanently or semi-permanently in high-risk areas would be the most likely to make convincing cases for worker’s compensation coverage. If buying travel insurance, since insurance guards against future unknown events, find out first whether there is an exclusion for infectious disease, pandemics, or COVID-19.

Real Estate Stocks. Real estate is generally seen as a safer investment, but with tourism down and people staying clear of public places, there has been massive selloffs. Airbnb froze all business in Beijing for two months. Hotels and shopping malls have been hard hit, and for whatever reason even self-storage REITS suffered a significant decline.

DISCLAIMER: Not intended to constitute legal advice, accuracy, nor completeness, and may not be relied upon as such; consult an attorney. FTIC is a national award winning title insurance company known for its white glove customer service and “No Junk Fee Guarantee.” ®

[1] Center for Disease Control – About MERS

[2] Vox – Why new diseases keep appearing in China

[3] NAR – Profile of International Transactions in U.S. Residential Real Estate – 2019

[4] Market Watch – What the Fed’s surprise interest rate cut means for mortgage rates

[5] World Health Organization – Q&A on coronaviruses (COVID-19)

[6] New York Times – Surfaces? Sneezes? Sex? How the Coronavirus Can and Cannot Spread

[7] Journal of Hospital Infections – Persistence of coronaviruses on inanimate surfaces and their inactivation with biocidal agents

[8] WSJ- Airport Shops Suffer Crisis as Coronavirus Upends Travel

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