Potential Impact of Coronavirus Outbreak on U.S. CRE Industry

Executive Summary

• As of February 18, 2020, the number of people infected by the coronavirus (COVID-19) was nine times more than the SARS epidemic of 2003. While more than double the people have died from COVID-19, the death rate among those infected by SARS was much higher.
• Infections are expected to peak sometime in March. Sentiment will be at a low ebb for another month, particularly in Asia.

How Serious?

Since the outbreak was first reported in December 2019, more than 73,300 cases of COVID-19 have been confirmed, resulting in more than 1,870 deaths (as of February 18, 2020). By comparison, during the seven-month SARS epidemic of 2003 only about 8,100 people were infected and 774 died.¹ China and the global community have moved to contain the virus, disrupting daily life and the economy in China. While the London School of Hygiene and Tropical Medicine predicted that the virus would peak in Wuhan in mid-to-late February, it now appears likely that it will be at least until sometime in March.

Figure 1: Confirmed Cases of COVID-19 vs. SARS

Source: World Health Organization and U.S. CDC.
¹World Health Organization. Situation Report. February 18, 2020.

Economic Impacts

The impacts to the U.S. economy and the commercial real estate industry are difficult to forecast. Industry sectors that export goods and services to China could be particularly affected, as well as U.S. hotels in markets that rely heavily on Chinese tourists. If the virus is relatively contained as expected in the coming weeks, impacts on the economy and most commercial real estate sectors will be noticeable in the near term but less substantive over the year, with a net drag on U.S. GDP growth of between 5 and 15 basis points.

Declines in Chinese tourism to the U.S. during the 2003 SARS outbreak were pronounced. Given the recent growth in Chinese tourist numbers, coupled with the more rapid spread of this virus and widespread airline cancelations, the impact of COVID-19 on U.S. tourism likely will exceed that of SARS. To better understand the potential impact, consider that U.S. visits by Chinese tourists are now 13 times more than they were in 2002, making China the largest foreign consumer of U.S. travel services (airlines, hotels, etc.).² 

Figure 2: U.S. Arrivals from China, Pre & Post 2003 SARS Epidemic

Source: U.S. National Travel and Tourism Office.
²World Health Organization. Situation Report. February 17, 2020.

In absolute numbers, Los Angeles, New York and San Francisco have the most overnight visits from China, while cities with the greatest Chinese shares of overseas visitors include Riverside, Los Angeles and Seattle. These and other markets undoubtedly will be moderately affected by reduced numbers of Chinese tourist visits. If fear over travel spreads to U.S. business and leisure travelers, the impact to the hotel industry will be more pronounced. 

Figure 3: U.S. States & Metros with most Chinese Tourism

Source: Oxford Economics.
Impacts will be felt most acutely over the short-term but provided that the base-case scenario plays out—infections peaking in the next month—a sharp rebound (as during the SARS outbreak) is expected. Nevertheless, it could take several years for tourism from China to reach levels that had been expected before the outbreak occurred.³

Chinese travel to the U.S. only accounts for 0.16% of U.S. GDP⁴ and the Chinese account for just 4% of international travelers to the the U.S., which in turn account for just 8% of total U.S. hotel demand. As a result, our base-case economic scenario is not substantially impacted.

Of course, there is potential for additional economic effects. China accounted for 4% of global GDP during the SARS outbreak. Today, it accounts for 16%. China also accounts for 20% of global manufacturing output and is a crucial part of the global supply chain on which many U.S. corporations depend.⁵ Everything from autos to electronic prototype production could be substantially affected if the virus continues to spread for longer than now anticipated. As things stand, we expect these effects to materially reduce Q1 GDP growth, but to unwind over the course of the year.

The next several weeks will be key to understanding whether a V-shaped disruption/recovery will take place, with most of the decline in one quarter, or if reverberations will impact the global economy for a longer period.

Figure 4: China Share of GDP 2002 vs. 2019

Source: Oxford Economics.
³Oxford Economics.
⁴Goldman Sachs, January 2020.
⁵Moodys Analytics, February 2020.

Potential CRE Impacts

Office

• Baseline: Office demand is minimally impacted.
• Downside: Economic drag increases amid uncertainty, potentially causing demand to slow, particularly in cities with a large amount of service exports or indirectly tied to goods exports to Asia.

Retail

• Baseline: Minimal impacts overall, though some retail markets dependent on Chinese tourism—particularly gateway cities like New York, Los Angeles and San Francisco—will feel short-term impacts from fewer Chinese tourists.
• Downside: Fear of infection causes consumers to limit shopping. Disruptions to high-value industries could weigh on economic activity, causing businesses and consumers to pull back and ultimately impact retail real estate dynamics.

Industrial

• Baseline: Primary impacts likely felt by manufacturers that export to China, though overall demand for industrial space likely will not be affected.
• Downside: Imports to the U.S. slow as production in China remains shuttered, impacting U.S. supply chains. Slower economic activity would begin to temper demand for the asset class.

Hotels

• Baseline: There will be a modest reduction in demand in key gateway cities due to fewer Chinese tourists. A rebound in Chinese tourism is expected by year-end, but impacts to demand and hotel room rates will reverberate beyond 2020.
• Downside: Fear of infection causes a reduction in discretionary business and leisure travel. Large meetings and conventions are postponed or canceled, causing significant disruption to hotel operations. A stigma toward travel and a reduction in Chinese tourism becomes longer-term, impacting hotel demand into 2021.

Multifamily

• Baseline: Very little near-term impact.
• Downside: U.S. economic activity slows, affecting the job market and thereby weighing on household formation and affordability.

Bottom Line

Goods and services exporters to China, as well as the U.S. travel industry, will feel the most immediate business impact from the COVID-19 virus. Should the virus continue to aggressively spread, broader impacts will occur for high-value industries like autos and electronics.

Though the 2003 SARS epidemic provides a good basis for understanding potential impacts, the financial and medical resources available to the Chinese government are much greater than they were then. The Chinese government has already injected substantial stimulus into the Chinese economy. On the other hand, China is more deeply integrated into the global economy today.

Global property market fundamentals remain strong and anticipated levels of economic growth should be enough to sustain these conditions, even with the effects of COVID-19, as anticipated today. A clearer picture on the COVID-19 epidemic should materialize sometime in Marc