The coronavirus (COVID-19) pandemic is shattering the global economy. Every industry in almost every country is being negatively affected. Stocks have plummeted, and central banks have taken bold steps to equalize, but the degree of uncertainty in the wake of daily news is unprecedented. President Trump’s administration seems to be reeling from the continual bad news, and even his most virulent supporters seem confused as to what’s going on. It’s tough to know who to believe in this time of crisis, and markets are reflecting the uncertainty.
No Bull Markets
Experts predicted weeks ago that a widespread
epidemic in the U.S. would hit the commercial real estate (CRE) market first.
This is already happening. All one has to do is look at how coronavirus
preventative measures have affected retail mall performance. Kroll Bond Rating
Agency (KBRA). KBRA’s Performance Outlook (KPO) rates CMBS SASB Retail Mall
Loans to underperform and for good reason. Every retail
mall in the country has either been shuttered or put in standby operational
mode. And still, there are those out there advising clients as if there were a
bull market.
Since President Trump just extended social
distancing guidelines until April 30, the Easter season is a wash for every
mall retailer. Green Street Advisors said the other day that Commercial
property values are off an estimated 24% since February 21st. Another part of
the sector being hammered is the trusts which own hotels (down 36%), casinos
(down 35%), student housing (down 30%). Anything tied to tourism is a fearsome
investment proposition. Again, the industry news has no cautionary tales.
Marketing Depression
While many agencies and real estate experts
are trying to forge forward with positive “narratives” the reality of a deep
recession in the U.S. is beginning to sink in. Residential sales are starting
to plummet across the spectrum, as are commercial deals. At one end of the
spectrum, savvy high net income investors are taking a cautious approach in the
wake of events. At the other end, massive job loss and losses to Americans with
small businesses will certainly put a lid on homebuying in the immediate
future.
To be honest, here, I am a bit appalled at the
level of “marketing fluff” going on in the industry in these unprecedented
times. It’s as if the whole property spectrum is in some kind of collective
denial. This seems absurd to me because the global market and the American
economy was already on shaky ground before the coronavirus outbreak.
A flash survey on March 16 and 17 by the National Association of Realtors reveals
agents across the U.S. canceling their open houses and half of all agents
surveyed telling of a huge drop in buyer interest. The linked CNBC story is one
of the only realistic reports telling what’s going on in the trenches. The
story revolves around Aaron Kirman, the agent/host of CNBC’s
“Listing Impossible.” The real estate star says he “thinks this
pandemic could devastate the real estate market.” Kirman is spot on in my
opinion. I think the reason so many experts seem behind the reality curve is
probably that the administration and the whole country are just now feeling
COVID-19 the way Asia and Europe have. The U.S. virus cases are only just now
being recorded according to the true magnitude of the spread.
The Trend Ain’t Good
One way to get an idea of where the U.S. real
estate market is headed is to look at what’s already happened in Milan and Seoul. Both these cities were
booming real estate markets before the pandemic hit. Office leasing, luxury
residential, rentals, the spectrum of real estate has all but dried up in both
cities. In South Korea, the country’s apartment market showed an 80 percent
decline in deal volume in the first nine days of March. And South Korea has beaten
back the COVID-19 curve. In Spain, hotels have been turned into medical
bunkhouses. In Greece, hotels and tourism businesses expect no 2020 tourist
season at all.
In Germany Adidas and H&M are now refusing
to pay rent payments for stores forced to close on account of the virus
pandemic. In cities throughout the European Union, there is talk of a
dissolution of the Eurozone altogether. Most people feel the talk of recession
is talk of a global depression. Infometrics Senior Economist Brad Olsen had this to say about the pandemic’s effects:
“It’s far faster and sharper than what we saw during the Global Financial Crisis, and it’s getting close to what we saw in the Great Depression of the 1930s, so it is the most serious financial crisis we’ve seen in living memory.”
The only real good news is a huge tax break
for wealthy real estate investors coming out of the $2 trillion coronavirus
stimulus package just signed into law. As it turns out, the Republicans in
Congress slid in a provision on page 203 of the economic bill which benefits
the top 1% who own real estate. According to a report from The New York Times, the provision allows
couples with more than $500,000 in annual capital gains or income from sources
other than their business, like real estate depreciation, to shelter capital
gains for this year and the two previous years.
Play Safe
Returning to the world as normal people know
it, I am drawn to an article at Financial Times entitled “Can the world afford fiscal and monetary
stimulus on this scale?” Gavyn Davies makes my point at the onset of his
report by pointing out that the global financial stimulus injection “is more dramatic than what we saw after
the financial crash.” He says the unaffordability of these huge stimulus
packages might end up devastating asset prices.
As I type this Nasdaq is reporting Asian shares and oil prices tumbling once again over fears that the global shutdown over coronavirus might last many months. This Salon article paints a grim picture of the current situation. It’s a “scenario” I think real estate decisionmakers must do contingency planning for. If we are headed into another Great Depression, it would be a very good thing for every type of investor to be more guarded. And this is not what anyone seems to be advising.
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