Commercial real estate outlook

Q2 2020: A storm rolls in

The outbreak of COVID-19 has caused an unprecedented dislocation in economic activity. We assess the current economic reality, the state of the CRE market as it entered this crisis, and what we’re watching as we progress through it.

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April 7, 2020 | 22 minute read

Executive summary

Coming into 2020, the commercial real estate (CRE) market appeared to be particularly healthy, with capital available, property leverage moderate and price growth leveling to a sustainable pace. Enter COVID-19, a black swan event that has engulfed financial markets and sent world economies into a presumptive recession. The speed with which this outbreak has impacted activity has been unprecedented, and many uncertainties remain about the ultimate effect on economic growth and asset prices.

For commercial real estate, it is important to remember that all recessions don’t hurt the same. Property returns do tend to moderate during downturns, as real estate is inextricably connected to economic activity. However, the 2008 financial crisis appears to be an exception, not the rule, for how CRE has performed in previous recessions. Still, this downturn is unique, with a fear-inducing health crisis leading to an economic crisis – a potentially destructive combination. Our outlook this quarter will examine the CRE market’s state as it came into this downturn, as well as items to watch as we progress through it.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Matthew Malone, CFA

Managing Director, Real Estate

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