COVID-19: Research Update IX


Will McIntosh, Ph.D
Global Head of Research

John Kirk, CAIA, CCIM
Senior Director, Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

Karen Martinus
Senior Associate, Research

Chenchao Zang
Senior Associate, Research

Jane Zheng
Associate, Research

June 30th, 2020

As the economic and real estate conditions continue to evolve in the wake of COVID-19, it has raised plenty of questions among market participants. The following includes several of the issues that we have contemplated in recent weeks:

What will be the economic impact of reinstating lockdown restriction to control the Coronavirus?

The near-term outlook remains bleak for the U.S. economy. First-quarter gross domestic product (GDP) was revised down twenty basis points last week to an annualized rate of negative 5%, and second-quarter GDP is now forecast to fall ~40%, according to Moody’s. The labor market also remains tenuous despite signs of increased economic activity in recent weeks as states began to reopen. Last week marked the 14th consecutive period in which at least 1.4 million workers filed for unemployment benefits. While the worst of the job losses have likely passed, the recent uptick in Coronavirus cases and subsequent rollback in state economies reopening (e.g., Texas, California, and Florida) have added uncertainty to the recovery. The Administration has not indicated a willingness to reinstate nationwide stay-at-home orders. Still, a recent statement from former Treasury Secretary Lawrence Summers may prove prescient, “30% of the economy will need to be shut back down – either by government decree or by people and companies acting on their own – to prevent the pandemic from getting out of control.” In either case, this dynamic reinforces our view that the economic and real estate recovery will be slow and uneven across markets, particularly as states, cities, and even counties have begun to enact separate measures to prevent the spread of the virus.

Notwithstanding a second wave of the virus, what other risks are on the horizon?

There seems to be an increased risk of a fiscal policy misstep, comparable to what occurred following the Global Financial Crisis (GFC).  From 2010 to 2014, fiscal policy was arguably a significant headwind to GDP growth, as Congress prematurely shifted to austerity. While the initial fiscal policy response to COVID-19 was swift and robust, it appears that the political appetite for more stimulus spending may be waning. Several fiscal programs are nearing their termination date, including the July 31st expiration of the Federal Pandemic Unemployment Compensation program. This federal initiative has provided unemployed workers with $600 per week in addition to State’s regular unemployment payments, which likely has helped multifamily rent collections exceed expectations during the pandemic, particularly for Class B & C properties.  While state and local governments are clamoring for additional federal support, some lawmakers have voiced concern about providing additional rounds of fiscal stimulus given the debt-to-GDP ratio is on pace to approach its highest level since WWII. However, failure to sufficiently address these issues could pose a significant risk to the expectation that the economy would begin to recover in the second half of the year.

How might the Fed’s yield curve control measures impact commercial real estate cap rates?

Several Federal Reserve officials, including Chair Powell, have recently highlighted the central bank’s interest in imposing yield curve control on U.S. Treasuries such that borrowing costs remain low throughout the recovery. The Fed has not indicated which maturities would be subject to yield control targets.  Still, there has been speculation that the central bank could cap yields near zero as far up the curve as the three-year Treasury (mirroring the policy by Australia’s central bank) and possibly even the 10-year yield, similar to Japan. In either case, the near-term effect on real estate cap rate should be minimal, given cap rates were already expected to increase in 2020 due to the weak economic outlook, cashflow uncertainty, and declining net operating income. However, as the U.S. economy bounces back over the next 2-3 years, cap rates should begin to recover to pre-crisis levels, according to CBRE, upon which time yield curve control could potentially have a profound impact on core cap rates given its historical spread (roughly 240 basis points) over 10-Year Treasury. Notably, NCREIF’s core cap rates fell to an all-time low of 4.29% in the fourth quarter of 2019, at a time when the 10-year Treasury averaged 1.8% during the quarter. Thus, assuming the relationship between cap rates and Treasuries holds and the Fed maintains a ceiling on yields, core cap rates could fall even further, possibly below 3% for the first time on record. This analysis is primarily based on historical performance. It does not take into account the notion that capital flows into commercial real estate are expected to be strong during the subsequent recovery, which could further impact cap rates.

Are near record-level delinquencies in the CMBS markets a harbinger of things to come?

The overall CMBS delinquency rate will approach an all-time high this month. During the GFC, the delinquencies rose gradually over more than three years, from around 1.5% in January 2009 to 10.34% in mid-2012. Conversely, delinquency rates have surged during the Coronavirus crisis – topping 10% in June compared to 2.29% in April. The situation in the CMBS market highlights how much faster the Coronavirus crisis is unfolding relative to prior downturns. Also, it is an indication of the possible distressed opportunities that could emerge in the lodging and retail sectors, given these property types have accounted for roughly 96% of the CMBS delinquencies, according to Moody’s.[1]

Notable Real Estate Updates

The following includes updates regarding June rent collections for the four major property types, per NAREIT:

  • Industrial: The industrial sector remained the strongest performer. Industrial REITs collected nearly 98% of typical rents in June on almost 4,900 properties in the U.S., consistent with collection levels throughout the pandemic.
  • Multifamily: Rent collections in the apartment sector continued to make gains in June, rising slightly to almost 98% of typical rents collected. The substantial rent collections reflect a combination of the increasing ability of renters to meet their lease obligations and the fact that REIT apartments generally serve a population less likely to be affected by layoffs during the pandemic.
  • Office: The office sector’s June rent collections experienced a slight increase to 96% from 95% in May on the nearly 1,800 REIT-owned office properties in the U.S.
  • Retail: In the retail sector, there are three subsectors – regional malls, shopping centers, and free-standing retail. Survey participation was not sufficient to warrant the release of results for malls, but the other subsectors showed a measurable improvement as state economies began to reopen:
    • The nation’s nearly 2,700 REIT-owned shopping centers saw the most significant increase in rent collected – an 11 percentage point month-over-month gain in June to almost 61% of typical rent collected.
    • Rent collections on the more than 16,000 REIT-owned free standing retail establishments showed a rebound from 71% in May to 79% in June.


Economic conditions remain uncertain, and we will inevitably have to revisit our outlook as events continue to unfold. The potential for a “second wave” of infections remains a significant downside risk to the economy, and the V-shaped recovery that many had hoped for seems increasingly unlikely. From a real estate investment perspective, the unevenness in the recovery combined with heightened volatility could increase the potential for market dislocations, which could ultimately lead to attractive investment opportunities.  Therefore, while we are cautious regarding the near-term economic outlook, we are also positioned to go on the offensive as opportunities emerge.

[1] Warcholak, Calanog, Salz, COVID-19 and Distress in CMBS Markets, June 9, 2020. Moody’s Analytics.



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