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Faculty Insights

WSB's Mark Eppli Describes How the Pandemic Has Shifted Real Estate

By Clare Becker

June 11, 2020

Illustration of homes with COVID-19 written in the sky

The U.S. residential and commercial real estate markets are prone to fluctuation in the face of crises, but the impacts imposed by COVID-19 have differed from those in previous economic downturns, like the great recession and 9/11.

Mark Eppli
WSB’s Mark Eppli

That’s not surprising, says Mark Eppli, director of the James A. Graaskamp Center for Real Estate and a faculty associate in real estate and urban land economics at the Wisconsin School of Business.

“We don’t have any good precedent for this at all. This isn’t an economic problem, it’s a public health problem, an area we don’t often think about in real estate. We call it a ‘black swan event’ because it’s something you see as infrequently as you see a black swan—an event that occurs outside of your normal 95% distribution or two standard deviations.”

Eppli is a sought-after expert in the real estate industry, often providing insights on issues that relate to his own research focus—commercial real estate, finance, development, and valuation. He is a board member for several key industry organizations including the Federal Home Loan Bank of Chicago (FHLBank Chicago), the National Association of Home Builders (NAHB) Mortgage Roundtable, and Milwaukee’s Mandel Group.

Below, Eppli discusses how the COVID-19 pandemic has impacted the real estate industry, particularly the residential and commercial real estate markets.

Residential: lost season, dip in sales

Pre-coronavirus, the U.S residential housing market was strong, Eppli says, and particularly so in Wisconsin. The state’s year-over-year house price appreciation for March 2020 was 12.2%, with the median price hitting a record high of $207,500.

While the economy benefited into April and May from the closings of sales earlier in the year, the COVID-19 crisis has forced a significant shift—and it’s going to look bleak, at least for a while, Eppli says. “Residential real estate sales are seasonal, and we’re losing those summer months where school is over and people more frequently move.”

He expects we will see a decrease in new sales for two main reasons. First, real estate is an “in-person transaction.” With the virus, suddenly that open house doesn’t seem as appealing anymore, as well as going through the normal steps of home buying. “Would you want to enter a stranger’s home or have your home entered by strangers? You’re also going to have to have your inspector come in, your appraiser come in, and all of those other person-to-person interactions.”

Second, uncertainty is a huge factor. With so many filing for unemployment and relying on temporary protection programs, potential buyers are going to feel uncertain, too. “You’re looking at 30% to 40% of the population out of the market,” Eppli says. “It’s usually the largest purchase in most people’s lives. Would you want to make that during a pandemic?”

Tips for buyers and sellers

For the brave buyers ready to take that step, Eppli says the extremely low interest rates right now are in their favor. “Get ready, get pre-approved, because the mortgage interest rates should fall to 3%, which makes housing really affordable. Buyers will want to lock in that 30 year rate.”

Sellers, on the other hand, shouldn’t expect much until 2021, but they should get ready to put the process in motion. “Be prepared to put your house on the market quickly, as the impact of the pandemic may retreat quickly with a vaccine or other medical treatment to limit COVID-19.”

Not always ‘Safer at Home’

To some extent, the COVID-19 crisis has exacerbated the existing inequities between renters and homeowners.

“The government is doing a fair bit to assist mortgage-holders during the pandemic, but not very much to assist renters—and renters are the group that probably need it the most,” says Eppli.

Households paying more than 30% of income to rent are considered to be “rent burdened,” he says; more than 50% of income put toward rent lands individuals in the severely rent burdened bracket.

Roughly 10.7 million households are severely rent burdened in the U.S., Eppli says, and that means struggling to survive, much less save.

“Those who rent are more likely to be service providers for hotels, for retail, for bars and restaurants. Those who own more often are married couples with two sources of income. Now add a pandemic with furloughs and it’s a tremendous amount of stress for renters who are the least able to weather an economic downturn. ”

For home owners, there are at least forbearance programs in place. “If you get forbearance, know that you’re still going to have to pay it back. It’s not forgiveness; it’s forbearance, so you’ll still have to pay that principal and deferred interest in the future.”

Mixed news for the commercial markets

The commercial real estate market is comprised of several different primary sectors, Eppli says, and some have fared better than others. Multifamily housing and industrial properties are doing well, while lodging and retail are “really challenged.” With the onset of COVID-19, many hotels completely shut down while others struggled to stay open with minimum occupancy.

Construction, considered an essential business in Wisconsin as in many states, continues, but Eppli predicts future slowdowns. NAHB’s housing market index fell 42 points in April, “the sharpest decline ever, which bodes ill for future construction. If you’re a lender, are you going to provide a construction loan for a new house or subdivision? You’re probably going to hold off and see what happens with COVID-19 infections. Early projections are that housing construction will be off by 30% in 2020 relative to 2019 for the second half of 2020. It’s really going to slow the market down for construction.”

Similarly, retail rent collections fell from 81% on March 10 to 44% a month later, with household names like AMC Theaters, H&M, Ann Taylor LOFT, and Staples having paid less than 5% of their rent obligations by the end of April, Eppli says. The issue goes beyond just individual brands and extends to America’s fading mall culture. The decline of an “anchor store” like Nieman Marcus can speed up a mall’s demise, Eppli says. “If these bigger stores don’t survive, how can that mall survive? In general within the industry, retailers big to small will continue to fail at an accelerated pace.”

Getting back to ‘normal’

“Returning to some version of normal post-pandemic may follow a U-shaped to Nike swoosh-shaped path both for the economic and social recovery,” Eppli says. Few economists believe that GDP will snap back quickly and come out of the downturn in a V-shaped manner; rather, a slower U-shaped recovery is likely.

“Seventy percent of GDP is personal consumption of goods and services. Today consumers are purchasing more experiences, and fewer soft goods in malls—COVID-19 really struck a knife right through the middle of that. Unfortunately, experiences almost always come with big crowds, making social distancing difficult. We all miss going to the corner taqueria, movie theater, sporting event, or concert, all experiences that were shuttered with many remaining closed through the summer.”

“After 9/11 it was considered patriotic to go back out and spend and not be intimidated by the acts of terrorists. Today, it is considered patriotic by many to hunker down and limit interactions to limit the COVID-19 spread,” Eppli says. “Now that we are starting things up, what will make Americans feel comfortable to be out socializing again? A year from now, especially with the high likelihood of a vaccine, I think we will quickly revert to our old patterns—go to a concert or a sports game, out for beers with friends—because that’s what brings us joy. I also believe in a collective compassion for others that may come out of what we’ve experienced with self-isolation. That may be a bit overly optimistic, but why not? This pandemic experience has forced us all to rethink what is important.”

Mark Eppli is the director of the James A. Graaskamp Center for Real Estate and a faculty associate in the Department of Real Estate and Urban Land Economics at the Wisconsin School of Business.