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Black Swans: When the Impossible Occurs.

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Resource Center is about all types of information resources that may be helpful for real estate market analysts and valuers--from print and online publications to data sources and websites. This edition of Resource Center takes a look at the COVID-19 pandemic and real estate expectations from this unexpected event.

Economic Forecasts and the COVID-19 Pandemic

The preceding "Resource Center" column (Winter 2020) included information about the real estate market projections for 2020 and beyond. That content was written just before the COVID19 outbreak was declared a national emergency. (1) The reality of the pandemic meant that those projections were no longer realistic. Massive, worldwide change occurred instead.

The COVID-19 pandemic has caused widespread shutdowns of business, entertainment, sports, and social activities; triggered massive federal and state aid programs, increasing national debt and causing financial problems for governments; produced serious mental and physical health problems in non-COVID-19 patients arising from delays in diagnosis and treatment of serious medical conditions; caused sharp increases in unemployment; and created a wide variety of legal issues for income property investors and business owners.

At this time speculation is rampant about the outlook for the economy, the coming general elections, and the financial conditions of entities reliant on sales tax revenue. The real estate sector of the economy is faced with the fallout effects of the pandemic as well. Real estate markets and property uses are tied to human behaviors that have been severely limited in the face of the pandemic. For example, social distancing has affected willingness to share high-density/ close-proximity environments endemic to city housing, public transportation, sports, entertainment, and travel (although it is unknown how long the social-distancing paradigm will persist).

Forecasts, such as those made by experts at the start of 2020, are always subject to unforeseen events and adjustments. The pandemic, however, is a catastrophic event with major implications that call for much more than mere adjustments to forecasts. Now, and into the future, there will be extensive discussion of how to analyze the event's economic impact; what we can learn from this circumstance; how long the economic, behavioral, and legal/governmental effects will last; and how to better prepare for the next such event.

For prognostication purposes, it is important to analyze how past catastrophic events changed society, the economy, and markets (for our purposes, primarily the real estate market)--and for how long. (2) The pandemic-related economic slowdown has quite different causes than other recent major events, such as the 9/11 attacks, the dot-com bubble crash, and the Great Recession. But we can still look at the aftermath of these events to check individual, societal, and governmental post-event reactions and learn from those experiences.

The Black Swan Strikes What Is a Black Swan?

You have probably heard the COVID-19 pandemic referred to as a "black swan event." The term black swan event was popularized by Nassim Nicholas Taleb. In his 2007 book, The Black Swan: The Impact of the Highly Improbable, Taleb describes a black swan event as an unexpected occurrence with widespread significant effects. (3) The term was subsequently popularized after the 2008 financial crisis. Taleb has cautioned those who may believe analysis of a past black swan event can meaningfully help prepare for future events:
   A black swan is an outlier, an event that lies beyond the
   realm of normal expectations. Most people expect all
   swans to be white because that's what their experience
   tells them; a black swan is by definition a surprise.
   Nevertheless, people tend to concoct explanations for
   them after the fact, which makes them appear more
   predictable, and less random, than they are. Our minds
   are designed to retain, for efficient storage, past information
   that fits into a compressed narrative. This distortion,
   called the hindsight bias, prevents us from
   adequately learning from the past. (4)

The primary characteristics of a black swan event are it is unpredictable, it is not what is normally expected, and it has severe consequences. (5) Black swan events can cause catastrophic damage to an economy, (6) and because by definition they cannot be predicted, we can only prepare for them by building robust systems. Standard forecasting tools not only fail to predict these events, they potentially increase vulnerability by providing a false sense of security.

The "black swan" analogy has been extended and modified to describe events with other degrees of predictability. For example, the term grey swan event is used to describe a potentially very significant event (positive or negative) that is considered unlikely but still possible. (7) The distinction between a black swan and grey swan event is the degree of probability. In economic analysis there are also white swan events. As you might expect, a white swan event is a highly predictable event. (8) Whether an event is a black, grey, or white swan is a matter of personal or collective judgment; there is no set metric or criteria for distinct categorization.

We do not study black swans to forecast future events since, by definition, black swans are unpredictable. We study black swan events to develop strategies to better deal with the aftermath of such events and to learn lessons for general preparedness. We study grey swan events, i.e., events with a higher probability, to understand cause and effect and to take steps that might prevent or mitigate such events.

If the COVID-19 pandemic is a black swan, perhaps other black swan events can be analyzed to project its effects on society, the economy, and, in particular, real estate markets. If the cause and nature of a past black swan are different, however, then we need to recognize that the aftermath might be different as well in terms of depth, breadth, coverage, and duration. Whatever the swan color, or the nature of the sudden catastrophic event, the important point is that we analyze what happened to be better prepared for next time.

Below are some commonly suggested examples of black swan events: (9)

* Black Death in Europe, 1347-1351

* European Flu Pandemic, 1889-1890

* World War I, 1914-1918

* Spanish Flu Pandemic, 1918

* Stock Market Crash of 1929 and Great Depression

* Black Monday Stock Market Crash of 1987

* Collapse of the Soviet Union, 1991

* Birth and Rapid Growth of World Wide Web and Internet

* Savings and Loan Crisis, 1986-1995

* 9/11 Terrorist Attacks

* Dot-Corn Bubble Collapse, 2000-2002

* Great Recession and Financial Crisis, 2008-2011

Sudden, major catastrophes without significant impact on the economy or society generally are not labeled black swan events. Also, not all major historical events qualify as black swan events. Finally, changes that occur gradually over time do not qualify as black swan events.

Black Swans, Grey Swans, and Grey Rhinos

The future is full of uncertainty: pandemics involving new diseases, new weapons of biological and nuclear warfare, global economic collapse, natural disasters, catastrophic internet collapse, massive political change, riots, and more. Given that such uncertainty is ever present, there is considerable commentary as to whether the COVID19 pandemic was truly a black swan event or whether such an event was for seeable. (10)

Many observers would call the COVID-19 pandemic a black swan event because of its far-reaching effects on society, government regulations, the economy and finance, consumer behavior, and business methods and attitudes. But there is some difference of opinion as to whether the current pandemic is a black swan or grey swan event as some believe that it was predictable, and almost inevitable, that an unknown pathogen would hit and spread. Whether the current pandemic is or is not a black swan or an event with another name is a matter of judgment considering the general criteria for such events: unpredictability, unexpectedness, and severe consequences. For examples of such discussions, see the following.

"Is Coronavirus Really a Black Swan Event?" WSJ article available at

"'Black Swan': A Rare Disaster, Not as Rare as Once Believed." WSJ article at

"Welcome to the Black Swan Event: The Future of Pandemic Response." Future Point of View article at

"COVID-19 Is a Black Swan." Forbes article at

"COVID-19 Is Truly a Black Swan Event, and We Can't Rely on History to Predict the Outcome." Everest Group article at

"Is the COVID-19 Outbreak a Black Swan or the New Normal?" MIT Sloan Management Review article at

"Coronavirus Is Significant, but Is It a True Black Swan Event?" The Conversation article at

"What Are Lessons for Leaders from This Black Swan Crisis?" Harvard Business School Working Knowledge article at"

"Why the Coronavirus Crisis Is a 'Gray Rhino' and Not a Black Swan." Fast Company article at This article references policy analyst Michele Wucker's "gray rhino" for events that are "obvious, visible, coming right at you, with large potential impact and highly probable consequences."

"Why the Coronavirus May Be a Black Swan Event." Inc. article at

Nassim Nicholas Taleb, the renowned commentator on black swans, is among those who hold the view that the current pandemic is not a black swan event. Taleb argues that the COVID-19 pandemic is not a black swan because it was not unpredictable. Instead, he calls it a white swan because of its predictability, if not inevitability. To see Taleb's commentary on the nature of the COVID-19 pandemic, check out the following.

"'Black Swan' Author Nassim Taleb on Warnings over Systemic Risks from Global Pandemics." CNBC video of Taleb available at

"COVID-19 and Risk Analysis: Look beyond the Black Swan Talk." The Diplomat article at

"Nassim Taleb Says COVID-19 Pademic[sic] Is Not a 'Black Swan.'" article at

"The Pandemic Isn't a Black Swan but a Portent of a More Fragile Global System." New Yorker article at

Potential Effects of COVID-19 Pandemic on Real Estate

Regardless of the specific swan label given the pandemic, the important point for valuers is the aftermath of the disrupting events. At this point there is much conjecture about the full effects of the pandemic on the economy. What will be affected and for how long? Black swans (and probably grey swans) affect investor and consumer sentiment and outlook for months, years, or even decades. They may impact regulations and laws, business health, capital expenditures on equipment and facilities--either expansion or contraction, costs, and purchasing power. Valuers interested in following the changing status of the economy should visit the website of the Federal Reserve Bank of St. Louis's Economic Research Division (FRED), which features a "COVID-19 Research Resources" section (https://research The resources include continuously updated research data and reports on economic conditions.

Although the pandemic's ramifications are wide reaching, our discussion here will primarily focus on the real estate sector. The broader economic situation will impact real estate markets in terms of real estate demand, values, pricing, marketing methods, volume of transactions, and leasing and investment strategies. Contractual provisions in place before the pandemic are sure to come under close scrutiny. In the face of general economic stress, the stakes will be high in how these provisions are interpreted. The following are some areas that will be the focus of special consideration.

Force majeure clauses. The courts will be called on to interpret force majeure clauses12 in real estate-related contracts, and cancellation of all or part of these agreements, as parties seek relief from contract performance. Threshold questions include, Does a pandemic constitute a force majeure as referenced in the agreement? Do the pandemic-related responses of the public and government constitute a force majeure? For discussion of these issues see "Emerging Legal Issues Arising from the Coronavirus Pandemic" ( and "Is the Coronavirus a Force Majeure that Excuses Performance of a Contract?" (

Demand effect. Unemployment and underemployment are expected to affect demand by buyers and investors for real estate. Similarly, impacted businesses are expected to adjust their demand for space, layout and design, and willingness to make real estate lease commitments. Local unemployment data is available from the US Bureau of Labor Statistics (

Rent obligations. Rent obligations cause financial stress for many tenants--residential and commercial, large and small--in tough economic times. Real estate occupancy costs and expenses are a major budget item for most tenants and users. Loss or reduction of income significantly affects the ability to pay rent, which in turn affects property owners. This results in a cascade of effects, such as the following:

* Temporary eviction moratoriums in some states allow rent to continue to accrue, with the balances increasing to potentially unsustainable levels for tenants.

* The lack of rental income impacts the landlord's ability to hold and maintain the property.

* Rent stress may result in rent strikes, particularly in rental apartments in some areas with extensive economic disruption.

* Rent postponement, abatement, and adjustment through modification of the lease and agreement of the landlord and tenant may permit the tenant to continue its occupancy, but the landlord may not be able to meet its expenses related to taxes, insurance, loan payment, and maintenance.

Federal, state, and local regulations may provide for rent relief. Some articles discussing potential changes in rent obligations include "Retail Tenants, Landlords Clash over Proposed Pandemic Rent Clauses" (, '"Cancel the Rent' Could Be Just the Beginning" (, "COVID-19: Renters' Rights and Court Changes during the Pandemic" (, "New Forms: Rent Forbearance Request, COVID-19 Agreement, Balance Reminder & Resident Resources" (, and "The Struggle to Pay Rent Extends to Major Restaurants and Retailers Too" (

Mortgage payments. Borrowers and lenders--individuals and investors, commercial and residential--are affected as tenants' ability to pay rent is adversely affected. Debt service goes on and accrues regardless of economic conditions. Creative solutions will be explored, including loan modification to allow temporary payment postponement, interest-only payments, and forbearance agreements. Borrowers will be looking for guidance from agencies such as the Consumer Financial Protection Bureau, which has published a "Guide to Coronavirus Mortgage Relief Options" (

Hospitality-related real estate. All hospitality types have relatively big real estate investment and significant holding and fixed costs. Hotels, resorts, bed and breakfasts, and Airbnb property owners/operators/investors therefore are facing serious difficulties due to the greatly reduced number of travelers. Hospitality-related associations can be helpful sources of information and data on the health of this real estate sector. A list of hospitality associations (with links to websites) can be found at

Transportation industry. The pandemic is affecting not only transportation equipment (planes, trains) design and layout, but terminal and station facilities as well, predominantly in terms of future layout and design configuration, use density, and income generation necessary to meet real estate-holding costs and expenses. The Airport Restaurant and Retail Association ( is one source of information on how COVID-19 is affecting transportation facilities.

Public venues. Sports venues, arenas, and convention centers all have pandemic-related concerns. Each of these sites needs population density paying to attend events to cover these properties' fixed costs. For information on the state of this real estate sector, see associations such as the National Independent Venue Association ( and the International Association of Venue Managers (https ://ww w.

Food and beverage enterprises. Restaurants, pubs, bars, and other similar businesses are all facing reduced demand from a slowing economy and uncertain economic outlook. In addition, there is the possibility of months (or years) of regulations calling for lower densities than are needed to support real estate costs and expenses and to ensure enterprise feasibility. Use modifications may be considered to help some real estate enterprises stay afloat. For example, ordinances, zoning, or lease restrictions that prohibit outdoor dining or grocery store use may be revised. Rent levels may be restructured or reduced rather than allow a property to fall vacant. The National Restaurant Association ( is a good starting point for data on the food and beverage industry.

Post-Pandemic Changes Likely in Real Estate

The current pandemic is likely to affect the real estate sector in the future in a number of ways. Some of these changes are obvious extensions of the recent behavioral modifications.

First, the pandemic led to more virtual gatherings. Teleconferencing increased dramatically for education, and businesses similarly shifted to telecommuting and teleconferencing. If these practices continue, they are likely to affect space demand, layout, and design. See, for example, the following discussions of impact of office space demand: "Pandemic Threatens to Upend a Thriving Real Estate Model" (, "The Post-Pandemic Workplace Will Hardly Look Like the One We Left Behind" (https://, "What the Future of Work Might Be after the Pandemic Is Over" (https://, and "Working from Home May Be a Permanent Feature of the Post-Pandemic World" ( Second, there is likely to be a return of some manufacturing from foreign countries, especially manufacturing related to critical products (e.g., medical, pharmaceutical, security, and defense items). This will impact demand for industrial and warehouse properties. Third, the trend toward virtual marketing of real estate will accelerate, with increased reliance on technology (e.g., drone video, virtual property tours, video conferencing, electronic escrow closings, and transaction mechanics).

Prognosticators are looking to past global events to get a broader picture of what the future may hold for real estate in terms of uses, prices, transaction volume, and mechanics. For example, see the Zillow article "Information from Past Pandemics, and What We Can Learn: A Literature Review" ( This article looks at research and data on the effects of other global pandemics, including annualized loss in GDP, and presents a case study of the 2003 SARS epidemic in Hong Kong. The article cites over twenty sources and is well worth reading.

Residential Real Estate

There is much speculation about how the pandemic and sequestration will impact the residential housing market. Potential effects include changes in housing transaction volume and sale prices. Some prognosticators are sanguine about the housing market's prospects at this point but cautious about the future; see for example the following commentaries.

"The COVID-19 Recession Might Not Be as Bad for Housing as the Last One." Barron's article at

"Southeast Housing Market and COVID-19." Federal Reserve Bank of Atlanta research report at The housing market analysis is based on the perspectives of home builders.

"What Will America's Housing Market Look Like after the Coronavirus Pandemic Ends? Here's What 5 Top Producing Real Estate Agents Had to Say." Forbes article at This article suggests that post-pandemic there will be a shift in buyers' housing priorities, such as increased demand for home office space and outdoor space.

"Why Home Prices Are Rising during the Pandemic." WSJ article at

Redfin's website includes weekly residential market updates with the latest data and charts on housing. Some articles of interest include the following.

"Charting the Coronavirus Pandemic's Latest Impact on the Housing Market." Redfin article at

"Home-Buying Demand Surges on Record-Low Mortgage Rates; Up 17% from Pre-Coronavirus Levels." Redfin article at

"The Housing Market's Road to Recovery in Four Charts." Redfin article at

Commercial Real Estate

It is expected that the commercial real estate market, like the residential market, will be impacted by the pandemic and sequestration. Commentators suggest that different market segments will have different post-pandemic experiences. The following articles offer analyses of the commercial real estate market and suggest segments that will do better or worse than the rest.

National Real Estate Investor provides a look at current commercial real estate trends and offers projections for specific market sectors. Some articles of interest include the following.

"CRE's Potential Winners and Losers in a VirusHit World." National Real Estate Investor article at This article identifies expected post-pandemic real estate winners, such as warehouses, data centers, grocery-anchored centers, distressed real estate funds, commercial mortgage-backed securities, and medical office buildings. Real estate losers are expected to include regional malls, senior housing, coworking operators, and hotels and resorts. The "yet unknown" category includes the multifamily rental, student housing, and self-storage segments.

"Life Sciences Might Be the 'Least Disrupted' CRE Sector." National Real Estate Investor article at This article looks at the life science building sector (e.g., lab space).

"Office Tenants of All Sizes Are Asking for Rent Relief. Some Institutional Owners Are Offering Them Deferrals." National Real Estate Investor article at

"The Office Market after COVID: Will It Be a Zero-Sum Game?" National Real Estate Investor article at This article discusses three possible scenarios for how office tenants might respond to the pandemic.

"The Short- and Long-Term Implications of COVID-19 for Seniors Housing." National Real Estate Investor article at This article covers implications of COVID-19 on the senior housing market and addresses issues of reduced demand, lower loan-to-value ratios because of perceived risk, operational changes, and items with longer-term implications, such as change in operations and management, patient density, and design and layout.

The following articles in Real Estate Issues also cover expected changes in commercial real estate.

"Impacts of the COVID-19 Pandemic: How Retail, Office, and Industrial May Be Affected by Changes in Human Behavior." Real Estate Issues article at

"The World Has Changed: The Smart City in the Post-COVID-19 World." Real Estate Issues article at This discussion is well documented and includes a variety of citations.

Interested readers will also find commentary on post-pandemic commercial real estate expectations in the following articles.

"8 Ways COVID-19 Will Change Architecture."

Architizer article at This article forecasts a shift away from large city offices; new restaurant layouts for social distancing and sanitation measures; an increase in modular structure construction that permits fast build-outs in emergency situations; and innovations in lightweight flexible building systems with adjustable walls to make transitions in space use. Also see "What the Coronavirus Reveals about Architecture: The COVID-19 Pandemic Has Accentuated a Flawed System." Architizer article at

"Life after the Pandemic: How New York and Its Real Estate Market Will Recover." Forbes article at While primarily about one part of the country, this article has some points to keep in mind for most metro area markets.

"Our Offices Will Never Be the Same after COVID-19. Here's What They Could Look Like."

Fast Company article at

"Rent Is Due Today, but Many Tenants Can't--or Won't--Pay." WSJ article at

Understanding COVID-19's Impact on the Real Estate Sector. Deloitte special report for real estate executives at

"US Commercial Property Sales Activity Drops 17% in February, March." CoStar article at The analysis provides helpful insight into the early effects of the pandemic on real estate.

"Pandemic Alters Lease Accounting Landscape."

Journal of Accountancy article at


Valuers are economists--perhaps more specifically, applied land economists. They study market influences, macro and micro, and the behavior of market participants and what influences them. Black swan events widely influence societal, individual, and market behaviors and are an example of one big, unforeseeable type of risk. Black swan and grey swan events have broad, deep, and sometimes long-lasting impact on markets including real estate markets. Such influences may, or may not, affect prices, volume of transactions, location preferences, various types of property use demand, and design preferences. These types of events remind us of risk, and the unavoidable uncertainties in forecasting. Even though grey swan events are expected, the timing is invariably a sudden event with high impact. Future analysis will most likely be directed toward best practices to mitigate the impact of the next--yet unknown--black swan event.

Dan L. Swango, PhD, MAI, SRA, is president of Swango Real Estate Counseling and Valuation International in Tucson, Arizona. He is experienced in valuation and consulting involving equity investment, debt security, risk reduction, profit optimization, estate planning and settlement, buy/sell opportunities, and eminent domain. Swango is an instructor and communicator with domestic and international experience. He is namesake of The Appraisal Journal's Swango Award, past Editorial Board chair and editor-in-chief of The Appraisal Journal, and a current member of the Journal's Review Panel. Contact:

If you know of additional resources of interest to real estate analysts and valuers--or would like to suggest topics for this column--please contact the author.

by Dan L. Swango, PhD, MAI, SRA

For easy, direct access to the URL addresses noted throughout this article, read this column online. Go to and click on "Latest Issue." (Login required.)

(1.) See "Proclamation on Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak," March 13, 2020, at A COVID-19 pandemic timeline is available at

(2.) For a timeline and discussion of past major disease outbreaks, see "The Worst Outbreaks in U.S. History,"

(3.) Historically, "black swan" has been used to describe something that had been thought impossible. The use of this terminology is based on the fact that Europeans were unaware of the existence of black swans until the seventeenth century. See, for example, "Black Swan: The Impossible Bird,"

(4.) See Taleb discussion "Learning to Expect the Unexpected,"

(5.) Investopedia, s.v. "black swan,"

(6.) This discussion will focus on economic impact, but of course the effects can extend to people (death, disease, injury, psychological), structures, and land (massive flooding or earthquake, for example).

(7.) Investopedia, s.v. "grey swan,"

(8.) For commentary on "white swan" events see AppraisersBlogs, "The Black Swan--Another Meltdown,"

(9.) Note most of these events are of greatest significance to Western societies, and a black swan event in one part of the world may not have the same major significance elsewhere. Dates shown are not necessarily precise.

(10.) For additional discussion on Taleb's black swan concept, uncertainty in markets, and the fallacy of predictions, see Hugh Kelly, "Black Swan--The Original Rara Avis," Real Estate Issues 42, no. 5 (March 21, 2018),

(11.) The Harvard Business School also offers a COVID-19 Business Impact Center webpage with articles covering the pandemic's likely impacts on economics and finance, technology, health care, work life, and business leadership and adaptation; see

(12.) The Dictionary of Real Estate Appraisal, 6th ed. (Chicago: Appraisal Institute, 2015) notes that force majeure literally means "superior force," and the term "usually refers to an unavoidable event (e.g., a strike, severe weather, a natural disaster) that results in failure to perform a contractual obligation."
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Title Annotation:Resource Center
Author:Swango, Dan L.
Publication:Appraisal Journal
Date:Mar 22, 2020
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