The Macro View
By David Grana
I’m starting to feel like Clark Griswold in National Lampoon’s Vacation. I am trying my best to make the most of this lengthy voyage through the economic shutdown, but it seems like there’s a snag at every turn. As the plethora of data and predictions come in, I wonder if our economy is the late Aunt Edna tied to the roof of the tattered Station Wagon. And perhaps the pretty girl in the Ferrari is the stimulus check and PPP loan that still hasn’t hit my bank account.
The current "economic vacation" is akin to the Griswolds' cross-country misadventures.
Regardless, the past six weeks have been a tragedy of errors that have exposed many cracks in our system and are laying the foundation for some very challenging times ahead. However, I am happy to finally say that there are some signs of optimism on the horizon. This is not to say that we’ll be enjoying a fun-filled Wally World adventure anytime soon, but it may provide some sense of hope after weeks of bleak news.
Let’s start off with the more challenging, but less surprising bits of data. The first are the jobless claims, which hit 3.84 million for the week ending April 25. This is the lowest jobless claims figure that we’ve seen over the previous six weeks, but it’s now put us at over 30 million in record time. Mind you, with many state unemployment divisions overwhelmed with new claimants, this number doesn’t give us a snapshot of the true number, which may be even more disheartening.
For some of those laid off workers who are fortunate enough to collect benefits, they now face the dilemma of going back to their former-employers, who need to retain them in order to preserve the forgiveness clause in their PPP loans. The additional Federal funding of unemployment benefits, on top of state benefits, has left many of these workers in a better financial position than prior to the economic shutdown. The knock-on effect is that small businesses that received PPP loans will be on the hook for 100% repayment if they are unable to restaff their organizations, according to the conditions set by the Federal government.
Wells Fargo announced the temporary suspension of HELOCs - Home Equity Lines of Credit. While the bank will continue to process refinance and purchase applications, the banks sees the market as too risky to take on HELOCs, with the growing number of unemployment claims and much uncertainty around economic stability. It would be unsurprising to see other financial institutions following suit, along with the increased requirements to be able to qualify for a standard mortgage or refi.
Source: NBC News
In the world of commercial real estate, the Chairman and CEO of SL Green, New York’s largest landlord, stated that rent payments for Manhattan office properties for the month of April were at 93%. This is in contrast to retailers, which had a payment rate of around 60-65%. Marc Holliday made the statement in an interview with Bloomberg Television, where he also confirmed that the company was unloading assets in order to create a cash buffer for the continued economic turbulence. Holliday foresees the office space feeling the effects of the economic shutdown for the next 12-18 months, however, he sees the market returning once employees feel safe enough to be back in the office environment. Much of this will be a result of major changes that will likely be undoubtedly be implemented by tenants, including increased sanitation standards and temperature checks, among other factors.
SL Green's share price has seen a significant drop since its
52-week high of $96.39
"With many of our consumption needs being underserved, and the economy being at such a low point, the numbers for Q3 will be overwhelmingly positive, relative to the previous quarter."
Former-Federal Reserve Chairman Alan Greenspan shared his views on the economy, stating that the second quarter would be “pretty awful.” He did state that he saw a strong third quarter, however, he shared his concerns over the fourth quarter and beyond. I share the same sentiment with Dr. Greenspan, and point to the nationwide protests demanding the reopening of the economy as a major factor. Pent-up demand exists, even if it is for half of the population. With many of our consumption needs being underserved, and the economy being at such a low point, the numbers for Q3 will be overwhelmingly positive, relative to the previous quarter. Unfortunately, that bounceback will be short-lived, as households and businesses face the limitations of Federal and state assistance coming to an end and depleted bank accounts and lines of credit.
Former-Federal Reserve Chairman Alan Greenspan.
Unless the economy gets “revved up” by Q4, which I find incredibly doubtful, given the many challenges and uncertainties up ahead for the economy, including future waves of coronavirus, I fear that Dr. Greenspan is correct in his assessment.
So where’s the good news, right? For starters, aircraft manufacturer Boeing, which represents (or represented pre-COVID-19) 1% of U.S. GDP, executed a bond sale valued at $25 billion. It was the largest bond sale ever for the aerospace company, which decided to forego Federal aid to help its already struggling business in the aftermath of the 737 MAX debacle. So, why is this good? Well, it’s a sign of long-term confidence in our aircraft industry, especially one that had been hit so hard just last year. It signals that bond holders see a return on their investment, and a belief in the company’s ability to continue to produce aircraft.
This should provide comfort to the airline industry, which has also been dealt a major blow through this crisis. The passthrough effects should also be felt by the hotel and resort industry, which should see a promising future ahead, once we eventually get to the other side of the pandemic.
And speaking of the hotel and resort industry, private equity giant Blackstone Group, which owns various properties on the Las Vegas Strip, purchased nearly 10% of Australian casino operator Crown Resorts. The purchase puts Blackstone as the second largest owner of the company, which made a few failed attempts over the years to break into the Las Vegas market. This comes on the backend of Macao’s casinos reporting a 96.8% decline in gaming revenues for the month of April, and much uncertainty around the timeline for the reopening of the Las Vegas casinos. Blackstone’s purchase mirrors bond investors’ confidence in Boeing’s ability to make a long-term comeback. These two industries have legs, but it will take time.
Macao's casinos saw a 96.8% drop in gaming revenue for the month of April.
The last bit of promising news is related to Gilead’s experimental COVID-19 drug, remdesivir. The Food and Drug Administration fast-tracked approval for the use of the drug to treat patients with severe cases of COVID-19. Although this does not provide a cure, nor prevention for the virus, it does shorten the time that patients must undergo treatment and signals a step closer to a possible vaccine.
I know that some of you may feel like I’ve gifted you a Puya raimondii, which only blooms every 80 years, however, the fact of the matter is that we can only invest our time and energy today with the objective of gains over the long-term. The short-term will still be fraught with many challenges and much uncertainty, but that should not prevent us from rebuilding today and looking forward to a bright future.
The Micro View
By Pam Junge, CCIM
Last week brought a magnitude of emotions, disappointment and frustration. We can’t seem to decide what’s worse - the virus or how it’s being handled. Much like the Griswolds’ trip to Wally World, the road to re-opening our city has been plagued with unprecedented moments of “What the…..?!?” Just open your Facebook or Twitter feed and it’s apparent that we are a city divided.
The closure of fictitious Wally World in National Lampoon's Vacation is an apropos metaphor for our economic shutdown.
Regardless of which side of the fence you may sit on, the common thread on both sides is an utter disdain for our government's planning (or lack thereof). In the absence of leadership, the masses have turned on the “We’re all in this together!” mindset and are fighting back the only way they know how. So here we all sit, together in a Station Wagon we never even wanted to buy, stuck with cranky Aunt Edna and her dog that we accidentally ran over, wrecked and stranded in the desert. But don’t fret, we will make it to the park, though it may be shut down for “repairs” for a while.
On Thursday, Governor Sisolak held a press conference to unveil his plan of action to re-open and re-start our economy. It wasn’t the poor audio or incremental buffering that left most Las Vegans deflated, but more the fact that the “plan” lacked any real definitive, actionable timeline. The news of state-mandated closures of casinos until at least May 15 spurred a flurry of big league corporate decisions that will have yet another ripple effect through our economy. Station Casinos announced Friday that the company is laying off a “significant” number of both property and corporate employees, effective May 16, likening current events to September 11.
“We have tried to retain our entire team, but in the face of this continued uncertainty we can no longer do so,” CEO and Chairman Frank Fertitta III said in a letter sent to staff Friday. MGM Resorts International reportedly laid off several executives, including four hotel presidents. While these actions inflict (what we hope to be) only short-term pain to employees across our city, at this stage of the game, it’s the unfortunate steps that must be taken for the long-term, greater good, to stop the bleeding.
Contrasting messages for Station Casinos employees in Nevada and Boyd Gaming staff members in Kansas.
Prior to last week’s layoffs, Nevada jobless level was nearing 20%. Nevada DETR reported 42,541 initial unemployment claims in the week ending April 25, up 7.7% from the week prior. DETR said 412,211 initial claims have been filed through April 25 since the beginning of the year. This marks the fifth-highest weekly total in state history. Heading into the pandemic, the unemployment phone lines were equipped to handle only 3,000 calls per week. It’s being reported that some claimants have called for three straight weeks with no success whatsoever. On a positive note, DETR announced last week that it has met the standards necessary to trigger extended benefits to claimants. Now, claimants who have exhausted their regular state unemployment benefits and their Pandemic Emergency Unemployment Compensation benefits will receive an additional 13 weeks of payments. Gig worker unemployment benefits are yet to come to fruition, with no hint of advancement in the last two weeks.
While the financial markets are still apprehensive, the Department of Housing and Urban Development announced changes to the FHA cash-out refinance program last week. “The changes preserve homeowners’ ability to convert home equity to cash via a government-sponsored mortgage but also improves the risk profile of HUD’s housing finance programs” according to the HUD press release. In short, the modification will require more equity and tighter qualifying guidelines. In reality, this may be a knee jerk reaction to lessons we learned in the crash of 2008, coupled with government-mandated mortgage payment deferments. Call it a moral hazard decision, if you will. For instance, if a borrower cashed in on a perceived $100,000 in equity in their home today and had to put those payments into deferment, it leaves the lender at great risk on two fronts: 1) the lender is ultimately responsible for the loan, and if it were to go into deferment, they are unable to sell it on the secondary market to recoup their funds and lend them out again (which is how they make their revenue), and 2) if the loan goes into deferment and eventually becomes a bank-owned property through foreclosure, there is no guarantee that the same or greater value will be there at the end of the day, leaving the lender with a distressed asset. So while many Las Vegas homeowners are sitting on a nice amount of equity in their homes, those thinking of tapping into it as a line of credit to ride out the financial storm may be sorely disappointed.
Nationally, we’re seeing home buying demand continue to gain steam as more and more cities and states look to end shelter-in-place orders and re-open sections of the economy. Local housing stats mirror that sentiment, and then some. Las Vegas Realtors, grateful to remain an essential service to their clients, adapted quickly to the new environment and limitations of conducting business. And with a whopping 788 houses gone under contract last week, it’s clear that someone is still buying homes. The number of new homes on the market has been consistent for the last several weeks, averaging just shy of 800 units. Price decreases continue to remain a factor, as the number of units decreasing their asking prices inches upward week-over-week. Last week’s sales came in at a record 646 units since the onset of the pandemic. While the information is unverifiable at this time, it’s believed that a majority of the new listings are from long-term investors - likely Airbnb properties which, much like the hotel industry, are dependent on tourism.
They suddenly find themselves with vacancies, mounting carrying costs and no foreseeable time frame for resumed revenue. And who are the buyers of these properties? It would appear that the majority are local families and first time home buyers with stable employment, looking to take advantage of low interest rates and stability of owning versus renting. While the players in the game have changed a bit, the current supply and demand are a benefit to the overall health of local housing. The challenge will be to continue down this path through the forthcoming waves of economic backlash we will inevitably feel, all tied to unemployment, the health of small businesses, the restart of our economy, consumer confidence and the appetite for tourism.
Could homeownership be the one thing that helps financially impacted residents of Las Vegas hedge their bets on making it through a downturn? With the growth we’ve experienced in the last seven to eight years, it’s an interesting thought. Historically, there is no greater wealth generator than a real estate asset. Unlike the crash of 2008, homeowners have skin in the game today. Faced with financial hardship, there is a much greater likelihood of selling that asset and cashing in on the equity than there is of making the strategic financial decision of walking away. It’s also a much more favorable end result to the city versus dealing with thousands of vacant and abandoned homes. While we have many more pit stops along the road to the amusement park, and no one knows precisely how it will go, we can see the gas station ahead. It’s time to fill up and get the old Station Wagon back on the road. Stay safe and healthy out there. We are #vegasstronger.
What was the state of the casino industry in Las Vegas prior to the COVID-19 shutdown?
2020 was primed to be a very special year in Las Vegas. We were anticipating the opening of Allegiant Stadium, the NFL Draft, and the construction of Resorts World and the MSG Sphere. Unfortunately, COVID-19 brought everything to a halt and torpedoed the enthusiasm that had built up.
"It’s going to be a very different experience
from the Las Vegas that we’re all accustomed to."
How did Las Vegas fare from the recent Super Bowl, which was a mere weeks prior to the shutdown?
The gaming numbers for the Super Bowl were extraordinary for Las Vegas. There was also an added bit of enthusiasm surrounding the NFL this year because of the Draft, which was supposed to welcome over a million visitors in late-April. The future of the NFL season now seems questionable. And whenever it does start, what that looks like for fans is highly questionable. The same applies to any large-scale public events.
What might the casino environment look like to visitors for the foreseeable future?
We can take a few cues from Macao, which shut down its casinos for two weeks in February. The response was not very positive, with revenue down 87% in March and very likely down 90% in April. They had closed off their borders to some of their more lucrative markets, and the numbers clearly reflect that.
Las Vegas will be a little different than Macao. We have a casinos that cater to locals, such as Station and Boyd properties, which are likely to open up before Strip resorts. They will likely implement rigid social distancing measures, such as requiring guests and employees to wear masks, plexiglass dividers between patrons and staff, constant deep cleaning of casino floors and rooms, and limits on the number of people in elevators. It’s going to be a very different experience from the Las Vegas that we’re all accustomed to.
"Casino balance sheets are going to look
significantly different when they open up."
What will all of these new measures do to operational expenses for casinos?
Operational costs are going to increase substantially to implement all of these measures. Revenue will get impacted from having less players on a table, and bet minimum are likely to increase. It’s going to require staffing the casinos with people who can perform all of these functions, which will impact the bottom line. Casino balance sheets are going to look significantly different when they open up.
Is there any timeline for when Las Vegas casinos may begin to see revenues get back to pre-COVID numbers?
Hardrock International Chairman Jim Allen stated recently that it would take 12-18 months to get revenue close to where it had been pre-shutdown. That seems to be the consensus across the gaming industry, however, the timeline may be longer for Las Vegas because of the conventions and meetings component of the economy. They are the lifeblood of The Strip and make up around 70% of casino revenue. It could take a while for visitors to feel comfortable enough to come to these large gatherings again.
What impact could we see on projects that are currently under construction around The Strip?
The MSG Sphere is an 18,000-seat arena whose developers will need to carefully think about how they are going to generate revenue when social distancing is such a major part of the equation in and around The Strip. Resorts World, which is scheduled for a mid-2021 opening will also need to considering making changes during this construction phase. The new AREA15 entertainment and shopping facility has a heavy retail exposure and will also need to take a good look at their revenue generation strategy if they are going to survive in the new normal.
"It may take a couple of years before we get back
to the level we were at before the shutdown,
but at the end of the day, we will continue to be
the entertainment and sports capital of the world."
Looking at the long-term prospects for Las Vegas, do we have a chance to come back?
Las Vegas has always been resilient. When Atlantic City came along, there were concerns that it would have a negative effect on visitor numbers and revenue, which never really happened. We’ve been able to come back from the 2008 Global Financial Crisis and the October 1 shooting, and I don’t see this being any different. It may take a couple of years before we get back to the level we were at before the shutdown, but at the end of the day, we will continue to be the entertainment and sports capital of the world.
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