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Back in April, shortly after the pandemic began to adversely affect American life, I wrote an article where I advised investors to go ahead with acquiring property. Since then, I’ve made a discernible shift in my opinion. Considering the current state of the economy and the housing market, my plan is nothing short of abruptly halting any new investment ventures in real estate altogether and preparing instead for a significant buying opportunity six to 12 months from now. Here’s why.
In April and May of this year, when the effects of the pandemic were beginning to be felt, nearly half of all commercial businesses didn’t pay their rent. By September, this resulted in the permanent closing of a whopping 98,000 commercial establishments. This situation affected commercial landlords to such an extent that they no longer had the cash flow for overhead expenses such as loan payments. Landlords’ inability to pay acted as a catalyst to stress commercial real estate owners and banks. As a result, many local and national banks did not receive mortgage payments on commercial real estate.
To make matters worse, the resulting chaos has brought into question the validity of the leases. Court processes have begun in countless cases to renegotiate terms. All the while, landlords struggle to find tenants to fill the vacancies at the previous rental rate — in the event they are even able to evict the existing tenants. This says nothing of the entities that have filed for bankruptcy, some of which were the largest retail giants in the nation that had been staples of our society for decades.
The Federal Reserve implemented a backstop in April in an attempt to prevent widespread failure, buying back corporate bonds within the secondary market. In essence, this changes the entire framework of our economic system, ultimately making our society dependent on the central bank. These are certainly unprecedented times, and without a frame of reference or a point in history we can look to as a model, we’re faced with an era of uncertainty.
Furthermore, as I am writing this article, nearly 60 million people have filed for unemployment since mid-March. This doesn’t even include the employers across the United States that have the ability and have taken the opportunity to renegotiate existing employees’ pay. What’s worse, in correlation with unemployment, closing of businesses and a general decrease in salaries for a large part of the workforce, a dramatic decline in overall spending will likely ensue. This economic uncertainty will likely continue to instill fear in the majority of the population, causing a dramatic pull back and further driving down the economy.
If you’re an investor considering whether to take the plunge on a property, my advice would be to hold off for now, but be primed for opportunity in the near future. I, for one, am on the edge of my seat waiting for a real estate investment opportunity so perfect it only comes around once in a lifetime.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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