As the number of coronavirus diagnoses and their potential impact on the global economy continues to increase, we will provide frequent updates on the latest developments. Read more below and here.
COVID-19 Situation Update
- Global cases confirmed as of March 10 were hovering below 117,000, with Italy, South Korea and Iran hardest hit outside of China.
- Of those who have been diagnosed, there have been more than 4,000 deaths and 64,000 recoveries, with more than 46,000 cases still active.
- Most new cases are being detected outside of China: Over the past week, the number of new cases was declining in China, and over the last two days, the country is reporting no new cases outside Hubei province where the outbreak began.
- Italy placed the entire nation under quarantine effective March 10, while South Korea has made free testing available to over 196,000 individuals.
- The U.S. passed $8.3 billion in emergency funding, and multiple states have declared a state of emergency to facilitate further state health department actions. Further action by the federal government is under consideration.
- Israel has implemented a 14-day quarantine to anyone entering the country.
- The number of countries imposing restrictions on travel continues to increase, now including Egypt and Saudi Arabia.
Global Economic Update
- Global equity markets remain extraordinarily volatile, and the general trend continues to be downward. The Chicago Board Options Exchange (CBOE) volatility index has more than quadrupled in recent weeks.
- The decline in equity markets, if continued, can have an impact on consumer spending and confidence via the negative wealth effect. It is still far too early to quantify the impact of the wealth effect or draw any hard conclusions.
- The flight for quality/safety continues. Global 10-year government bond yields are down nearly across the board. In the U.S., the 10-year Treasury yield fell to an all-time low of under 0.5% on March 9.
- Oil prices, which had already been trending lower, fell sharply March 9 as news broke that Saudi Arabia and Russia were not able to agree on production cuts.The West Texas Intermediate (WTI) fell by more than $10 per barrel that day alone. The WTI is hovering around $30 per barrel as of this writing (March 10), down more than 50% from where prices stood at the beginning of the year.
- Declining oil prices have never caused a U.S. recession, and in fact, are often considered a net positive for economic growth in nations that are net importers of oil in the form of higher consumer spending via lower gas prices. According to Moody’s Analytics, every penny decline in gas prices typically frees up $1.1 billion for consumers to spend over the course of a year.
- However, low oil prices do create headwinds for oil-producing markets and can also be a drag on oil industry investment. Moreover, the typical boost in consumer spending from lower oil will not be as significant in the near-term given that COVID-19 is more likely to keep people at home rather than traveling and spending.
- Central banks around the world are acting to either address the current impact or get ahead of the potential economic fallout caused by the coronavirus. The Federal Reserve cut the federal funds rate by 50 bps last week. Other central banks — those in Australia, Malaysia, Indonesia, Singapore and others — have also stepped up support. The People’s Bank of China is also stimulating aggressively through monetary and fiscal policy measures.
- While it’s still early, we note the following data points on the performance of the economy:
- There are some early signs that economic activity is accelerating outside of Hubei, in cities like Beijing and Shanghai.
- The COVID-19 outbreak does not appear to be impacting the labor markets in the U.S., or at least, not yet. The U.S. economy added a very strong 273,000 net new jobs in February 2020, and initial claims remain at 50-year lows in the week ending February 29.
- Global PMIs have deteriorated, with China hit hardest in February. The eurozone and UK showed greater resilience, led by services rather than manufacturing.
- The U.S. services sector ISM index improved in February and remains at a high level. Services represent about 86% of U.S. employment. Small business confidence also improved for the month.
Commercial Real Estate (CRE) Update
- There isn’t a lot of data to gauge the impact of COVID-19 on property markets. The CRE industry reports most data quarterly. Until hard data rolls in for Q1 2020, we cannot draw any firm conclusions; no one can.
- Here’s what we do know:
- In general, CRE leasing fundamentals were in solid shape going into this. In the U.S., office vacancy stood at ~13% entering 2020. In Europe, office vacancy was a very tight 6.3%. In Asia Pacific, office vacancy was rising, particularly in Mainland China, but that was also true prior to the outbreak. Certain parts of China are in the midst of an office construction boom.
- Overall, the supply pipeline has been very disciplined throughout this cycle versus the past cycles, making the threat of dramatically overbuilding in most markets minimal.
- There is no evidence indicating that the global industrial logistics boom is winding down. Industrial occupancy was at an all-time high going into 2020. The supply disruptions are likely to have an impact, but any analysis at this stage is pure conjecture and not supported by data.
- There is currently limited data available on investment sales activity in 2020. Real Capital Analytics has released January’s sales volume figures for the U.S. Investment sales were down 4% in January of 2020 versus a year ago, but still healthy. CRE values were also still holding firm as of January and were generally still appreciating across most asset classes.
We will continue to monitor the coronavirus and its impact on property very carefully and provide updates as frequently as possible.