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
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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.
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 like all of your points, well thought out and interesting possibilities. I was thinking more from a real estate / landlord perspective, but what you've described definitely has overall downstream effects on the economy as a whole. In terms of bricks, in all the scenarios above these short term effects (even if it's a few months) shouldn't affect your ability to collect rent (sure smaller mom and pop retailers are a real risk) nor the ultimate dispo cap on your acquisition a year or whenever from now (unless we are discussing that cap compression of course). The flex space / work from home situation is a big debate that we seem to be on opposite sides of - let's leave that to the other thread so we don't derail the topic at hand.
Fast forward a few weeks and we are just beginning to see the cracks and ripple effect of this pandemic. Acquisitions have halted at my shop and we have been guided to only pursue distress investments. Rent relief discussions have been happening across the board, not just in retail (thankfully we don't own any investments in hospitality). Force majeure clauses are being brought up and delays in construction are just beginning.
Is anyone concerned about layoffs? Thankfully I've been with my company for quite some time and we run really lean, so I'm not as concerned. I'm sure for ones that aren't concerned about getting let go, year-end bonuses will be impacted.
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.