Commercial Real Estate: Outlook and Uncertainty

Because office buildings are empty, stores are open only a few hours, and hotel occupancy rates are considerably low in this health crisis, the outlook for commercial real estate has been clouded and an uncertain future is projected.

Tuesday, March 30, 2021

Containment measures taken over the last year in response to the pandemic have closed stores and offices, and dealt a severe blow to demand for commercial real estate, particularly in the retail, hospitality and office segments, according to an analysis by the International Monetary Fund (IMF).

Learn more about the "Real Estate Project Feasibility Studies" that we carried out at CentralAmericaData.

The document published on March 29, 2021, highlights that "... beyond its immediate impact, the pandemic clouded the outlook for commercial real estate, given the emergence of trends such as the decreasing demand for traditional stores in the face of the advance of e-commerce, or for offices as teleworking policies are imposed. According to a recent IMF analysis, these trends could disrupt the commercial real estate market and threaten financial stability."

According to the IMF, the situation of the commercial real estate sector could affect global financial stability: it is large, its price movements tend to reflect the overall macro-financial picture, and it relies heavily on debt financing.

See "Central America: Is the Real Estate Market Moving?"

The analysis explains that "... in many economies, commercial real estate loans represent a significant share of loan portfolios. In some jurisdictions, non-bank financial intermediaries (e.g., insurance companies, pension funds or investment funds) also play an important role, although banks remain the main providers of leveraged finance to the commercial real estate sector globally. An adverse shock to the sector could push down commercial real estate prices, damaging borrowers' credit quality and weighing on lenders' balance sheets."

After analyzing the impact of the pandemic, our research also shows that price misalignments are now more severe. However, unlike other episodes, the misalignment this time is not the product of excessive cumulative leverage, but of a sharp drop in both operating income and overall demand for commercial properties, are some of the elements provided by the publication.

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NAI Costa Rica is the representative of NAI Global in Costa Rica and Central America, leaders in real estate consulting services worldwide; with 380 offices in 55 countries around the world.
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