COVID-19: Some Cautionary Advice in Favor of Worst-Case Scenarios

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.