Coronavirus is causing a lot of disruption in the global markets. Treasuries are at all-time lows as investors dump riskier assets in search for safer options. The stock markets have plummeted and are whipping out massive gains (dow dropped nearly 4,000 points this week alone; 30-stock benchmark plummeted nearly 1,200 points on Thursday, its biggest 1-day drop EVER; S&P has dropped more than 10%, the fastest slip into correction territory since the Great Depression). Was anyone else's offices enamored by Tesla's recent stock rise this past month? All of those gains [last month] are whipped out due to the scare of its China operations.
What are your guys' thoughts on this topic? Obviously this is going to have many direct (and indirect) impacts to the commercial real estate industry. My company has many developments in process (thankfully covered by GMPs) but there's major concerns of supply constraints regarding materials. On the positive, we're accelerating a few refis that were going to be done later this year, which will be accretive compared to our previous projections.
I do not see us going into a recession
Relevant username
What's your reasoning?
Recession by definition: a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. The US economy grew 2.1% in the Q42019 (with 2.3% for CY 2019). Many economists are predicting a drop in GDP for Q12020 and beyond.
Really trying to understand how this is impacting others in CRE specifically, or if it isn't.
Regarding financing, I understand that LifeCos and CMBS typically have floors on their indexes, so in the short term this might not be impacting them as much (vs. banks which some don't have floors). But how are you guys projecting financing future deals given the current volatility we are experiencing?
How about development /construction guys? Are you seeing impacts to supplies /materials with this scare?
A few other things to consider that will likely be impacted until until vaccines are rolled out and this mother f'r is contained:
Impacts to Travel - given global scares, people are going to travel significantly less. This will have a negative impact on hotel occupancy, along with a drop with conference center utilization. Tourist cities will be impacted more than others. Flights will be cancelled. Impacts to meet business commitments, etc. etc. Not to mention, sporting venues will be cancelled (talks of cancelling the olympics as well...)
Supply Chains - will interrupt production all over the world. Manufacturing will be delayed. Retail goods will be impacted. ripple effect for businesses.
Child Care - People working will be disrupted if child care centers and schools start to close down. This could be the most severe signal that the virus could drive the US into recession. Some say unlikely, but others are saying this is certainly a possibility.
Bulk Port Warehouses - Warehouses that deal with imports of construction materials, car parts, and electronics. All negatively impacted.
Flexible Work Scheduling - The office markets will likely see an increase in flexible work scheduling and more telecommuting from home.
Real Estate Refi's and Acquisitions - given the recent drop in interest rates, this should steer more capital into real estate. Could be some impact to cap rates and see some cap rates widen (especially retail and office) , but the low treasuries may offset the widening and keep cap rates down.
This will need to go on for many, many months to have a meaningful impact.
Unless you think that a 6 week scare is going to have a permanent effect on work habits? Somehow that seems unlikely.
Impacts to travel - this is real. Hotel occ in China was like 15% after corona blew up, pretty brutal. Just this week our senior guys cancelled their trips to Europe. Several confences have been cancelled there. My company just issued a ban on non essential travel. Hotels are hurting big from this all over the world and I expect this to go on for while more.
Supply chains - this one is also very real and the obvious reason for the market crash. Everyone's projected 2020 just took a clear step back, stock values down.
Child care - pretty extreme scenario but agree.
Warehouses - not sure I follow this - they're still paying rent who cares.
Flexible work - I agree with the overall sentiment that this is overblown as the other thread is also discussing. I work from home sometimes but will lose my fucking mind if I stay there. Half my company is floaters/hot desks also, but deal people and senior folks have real setups. If someone took my standing desk with 500 screens and asked me to float around the office with a fucking laptop like a damn gargoyle im quitting, good bye.
Cap rates - totally agree on transaction volume, but why would cap rates widen if money is pouring in? Woudl be the opposite. Plus idc what anyone says, treasuries and cap rates are correlated and lower rates = lower caps.
Warehouses - not sure I follow this - they're still paying rent who cares.
For bulk port warehouses that deal with imports of construction materials, car parts materials, electronics, etc., there's a halt in business, therefore a disruption in revenue (even if temporary) and a ripple effect up and down their supply chains.
Alternatively, I can see a positive impact for local warehouses that service last mile (to the extent that inventories are produced locally): there will be a surge in e-commerce as people are freaked out as fuck to go out in public. Grocery shopping on-line will surge. Retail will be affected, again unsure the extent, but will be impacted.
Cap rates - totally agree on transaction volume, but why would cap rates widen if money is pouring in? Woudl be the opposite. Plus idc what anyone says, treasuries and cap rates are correlated and lower rates = lower caps.
Yes, I agree, but I believe there will be negative impacts to retail and office space as a whole for comments mentioned above. The correlation of cap rates and interest rates is a debatable topic, but yes, I agree that the drop in treasuries will most likely keep cap rates the same, if not lower along with the drop in interest rates, for multifamily and [last mile] industrial markets.
I’m interested to see how large institutional investors react, specifically pension funds with defined allocations to various asset classes. If their equities portfolio drops 10% and no change in real estate portfolio value, they’re effectively overweight to real estate at the portfolio level. This may be the right move from a return perspective, but wouldn’t be surprised if some portfolios pull back on real estate to get back in line if this is sustained. The pullback would be seen in the open end fund space most notably given the higher liquidity. If pension funds pull back, you would have less capital flowing to real estate, but there’s so much capital chasing so few deals, I wouldn’t expect much of an impact to pricing.
This is a great point - with all of the recent talks of all these giant allocators either increasing or wanting to increase their real estate allocations, I wonder if this event may have quickly balanced them to where they actually wanted to be in their splits..
I never thought of this. However, I thought that their allocation values are determined by the amount of capital they deployed, not what it is worth today, right?
When I was actively working in portfolio management, it was based on value rather than capital deployed.
In 2016 and 2017, many real estate portfolios had ran up so much in value (portfolios were marked to market quarterly), that we were putting in redemption requests for clients despite real estate being some of the highest risk adjusted returns available. It didn’t matter however, as these allocation decisions are typically done with board/actuarial/consultant feedback and it’s a lengthy process to get it changed. A CIO doesn’t want to be on the hook if things go south and they were out of compliance...it’s much easier to blame poor performance on allocations that were decided by multiple parties.
The Denominator Effect is real. Our institutional capital partner went from an RE allocation of 15% to 18%+ literally in the past month. Liquidity is king in this market and everyone is chasing to find cash. No one wants to sell because of imparity.
I'm hearing a full "pencil's down" take from some of the largest institutions on real estate investments. Many are shifting their focus on credit opportunities.
Not sure about RE but Trump and the Fed are making things worse.
Our economy is where it is because the consumer has continued to spend big in the late cycle, which leads me to another point.... A lot of consumer trends are driven by an experiential need.
My prediction is that this becomes a long term health issue - subsiding in the summer and exploding in the fall/winter. My prediction is that this affects the retail sector over the long term.
What happens when the mother or father of a working class family has to stay home and take care of the kids and that family loses a 2nd source of income? Are they going to spend disposable income on 'stretch' goods (i.e. consumer goods or services that are nice to haves, but not necessary, like iPhones, new next-gen consoles, TVs, etc.)
What happens when people stop going out to Disneyland or eating out at the local mall/gathering hole for dinner and those companies lose that revenue? How long do these businesses survive with >3 months of decreased sales and spiked occupancy costs?
Does this feel like a Black Swan event that causes every asset class to drawdown 50%? I don't think so... but certainly feels like we're no longer in a grow mode. And that means a likely recession.
I've heard from a few health care professionals they're expecting an explosion in cases here in the US since we haven't been testing at all.
The one sector sector that is going to have an incredibly tough year is tourism and lodging. It was already late into the cycle and hotel bankruptcies were already starting to pop up before all the hysteria. However, in the long-term a lot of investors and lenders appear to already be considering this year as a one-off.
I'm projecting 2021 will be a strong year with all the pent up demand from 2020. Many people are postponing their vacations for next year.
On a side note, anybody that's not afraid of the coronavirus should look into booking a foreign vacation this year. Just booked my flight and hotel in London, and I'm paying a fraction of what I'd pay prior to the coronavirus scare. Probably gonna hit up several other cities as there are big room rate discounts being offered in Paris, Rome, and Florence.
What rates are you seeing?
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