Published June 29, 2020
The Macro View
By David Grana
If you want to get an idea of the current state of the economy, I highly recommend that you check out the car chase scene from the 1964 classic The Pink Panther.
The car chase scene from The Pink Panther
I won’t go into too much detail, for fear that you’ll think I’ve gone absolutely mad, but it involves a costume party, two gorillas (each driving their own convertibles), a jester, a knight and a zebra chasing one another through the narrow streets of an Italian village. It is, by far, one of the most confusing and hilarious of chases ever, and well worth viewing.
With the number of coronavirus cases rising across the country, what seemed like an optimistic reopening of the economy a mere two weeks ago is now in course correction. The forward momentum has all but stopped we’re now moving in reverse, with taverns and bars shuttering in Florida and Texas, mandatory mask directives issued across various states, the postponements of amusement park openings, and on, and on, and on. This has sparked yet another societal division which threatens businesses. It appears that the issue of whether or not to wear a mask is the latest topic of debate, which appears to be 50/50, but which also has many dissidents opting to stay at home, rather than spend while wearing a face covering. This backlash comes at the detriment of (once again) retail establishments, while boosting home delivery. Once again, the warehouse space appears to be winning the battle of the consumer, and in this case, they didn’t have to do anything to perpetuate it. And speaking of retail, GNC is the latest consumer establishment to file for Chapter 11 bankruptcy, with more likely in the waiting as we enter a new week.
This mask/no mask debate may have an unintended effect on the vacation and resort sector, which was described early-last week by Airbnb CEO Brian Chesky. The head of the preeminent online lodging platform declared that travel as we know it will change forever, with holidaymakers opting to visit lesser-traveled, less densely populated destinations, including smaller cities and national parks. With coronavirus not appearing to be going anywhere and much averseness to masks, all of a sudden that cabin in the mountains seems far more appealing than the crowded theme park. And with work-from-home becoming the rule, as opposed to the exception, as long as you can connect to WiFi, the ability to escape civilization and do your job may become more commonplace.
A late-Friday tweet about Blackstone Group may be an ominous sign for hotel assets.
That prediction was backed up by a tweet by CNBC’s Carl Quintanilla late Friday, which stated that Blackstone Group is more than 30 days delinquent on $273.7 million of debt tied to a portfolio of business hotels. He added that this could be a sign that large real estate investors are considering walking away from properties in the pandemic economy. While the latter is still a great unknown, the former is a scary sign for hotel properties, especially since Blackstone CEO Stephen Schwarzman predicted a “big V” recovery this summer, during the Bloomberg Invest Global virtual conference. Of even greater concern is the fact that Blackstone is the owner of a number of prime resort properties here in Las Vegas. Is this a foretelling of things to come?
"...what may have spooked investors to the core was the Federal Reserve’s warning about some banks after it conducted its annual stress test and found that some of them could get uncomfortably close to minimum capital levels due to the pandemic."
After a stellar run since its freefall in late-February, the stock market got pummeled last week, with the Dow down 3.3% and the S&P 500 down 2.9%. The optimism of a quick and successful reopening has all but been wiped away with rising COVID-19 cases across the country. The weekly jobless number didn’t exactly help either, with 1.48 million new unemployment claims for the week ending June 20. But what may have spooked investors to the core was the Federal Reserve’s warning about some banks after it conducted its annual stress test and found that some of them could get uncomfortably close to minimum capital levels due to the pandemic.
That was the one thing that gave us all respite since the coronavirus reached our shores - this was a health crisis, not an economic one. That is what every pundit out there exclaimed. Well, banks possibly reaching low capitalization levels sure looks like an economic crisis in the making to me.
Credit card companies are now tightening their belts en masse, with most firms pulling back on transfer offers, fearing that consumers may not be able to pay back the debt. And you can certainly understand why, given how the absence of a May stimulus check has resulted in a drop in disposable income from April, which is when most households enjoyed the additional boost. Discussions around another stimulus package are in the works, though the details remain murky, and it’s quite possible that it won’t include households that had received a check in the previous round. With the additional, Federally-funded $600 unemployment benefit ending in July and eviction moratoriums coming to an end in many states in the next few weeks, one can’t help but feel that we are, indeed, reversing course.
Business and real estate owners in Seattle have filed a lawsuit against the city for its tolerance of protesters who have vandalized and occupied their properties and establishments in the newly formed “Republic of CHAZ” (or CHOP). While Seattle Mayor Jenny Durkan has referred to this seizure as a “Summer of Love,” the owners and tenants of the many retail and multifamily properties beg to differ and hope to make good on their legal claim.
I’ve mentioned it last week and will do so again - incidents like the foregoing will set the stage for jurisdictional arbitrage. Real estate investors and developers will determine project and property values based on legal protections of municipalities and states. Many larger metropolitan areas that do not offer the enforcement of such protections face properties with rising cap rates and a flight by investors to cities and states that do. This may be a repeat of recent history, which saw larger cities during the 1980s deteriorate as crime rose and as investors fled for greener pastures where property owners enjoyed the enforcement of rule of law.
Strap in, stay alert, and get ready for the week ahead. Who knows where it’ll lead us!
Photo of New York City Subway car taken during the 1980s
The Micro View
By Pam Junge, CCIM
It’s been another eventful week with a buffet of reporting topics, to say the least. I’ve never felt like the world has moved so slow while concurrently changing so fast. We find ourselves smack dab in the midst of critical economic and cultural paradigm shifts that will inevitably change life as we know it and it’s a challenge to keep pace. Every time I think we may have reached the pinnacle, there is yet another peak ahead.
Attitude and confidence can change on a dime, and that appears to be the case with tourism. Two weeks ago I optimistically reported that travelers coming into McCarran International Airport were happy to move about and look forward to vacationing after the long Stay at Home Directive, which was corroborated with our strong reopening numbers. Recent spikes in COVID-19 cases have altered that conversation drastically in the last two weeks. The city is currently offering approximately 105,000 rooms (of our total inventory of about 150,000) and we’re running somewhere close to 55% occupancy on the weekends and 25-30% on the weekdays (and don’t forget to factor in that room rates are down as well). Pre-coronavirus and resort closures, we averaged approximately 90% occupancy at full capacity. Destination Analysts recently performed a survey to test the temperature of consumer fears around traveling and normal, day-to-day functions. They reported the following percentages feel they’re unsafe: using Uber, Lyft or a taxi - 57.4%; traveling on a commercial airliner - 61.1%; going to a casino - 66.9%; attending a musical performance - 67.9%; attending a conference or convention - 68.7%; attending a stadium sporting event - 70.6%; and traveling by bus - 73.3%. And, of those surveyed, 35.7 percent say they won’t travel until a vaccine is distributed, with 36.2 percent saying they would.
Tensions in the resort industry continue to heat up as culinary workers cry for safer working conditions. The casino workers’ Culinary Union stated that it is suing the companies for injunctive relief under the Labor-Management Relations Act, based on the hazardous working conditions that employees face. The workers have a long list of demands, such as enforcing guests to wear masks, enforcing social distancing, posting a COVID-19 safety plan and providing adequate COVID PPE for employees, amongst many other demands. This all comes on the heels of the passing of a Caesar’s employee that tested positive for the disease. All co-workers that came into contact with the deceased are on paid leave, self isolating and will not return back to work until they test negative.
Tensions between casinos and the Culinary Union are on the rise after the COVID-related death of a Caesar's Palace worker.
With loads of mental fatigue and what can only be described as an antiquated, broken system, the Department of Employment, Training and Rehabilitation (DETR) continues to get backlash for tens of thousands of unpaid claims. Some of the unemployed are going on three months with no relief. While these facts appear unconscionable, a Review-Journal analysis of U.S. Department of Labor data somehow shows the DETR not only paid people faster than many states, but it improved its speed in March and April — even as the state reported the highest unemployment rate nationally amid record numbers due to the coronavirus pandemic. The Review-Journal also analyzed the percentage of the state population who received their first unemployment paycheck in March within seven days. They claim the data shows 87.7 percent of jobless Nevadans received their benefits within one week of filing in March, ranking it 17th when compared to other states. “While there is still enormous amounts of work to be done, it is important to acknowledge the department’s efforts and successes as it relates to the most unprecedented unemployment situation the state and the country have ever experienced,” DETR spokeswoman Rosa Mendez said in a statement. Standard UI claims totaled 10,347 for the week ending June 20. There have been 517,240 initial UI claims filed since the week ending March 14. DETR reports that this is the eighth consecutive week of declines in standard initial UI claims. And my favorite quote comes from Adam Kamins, Senior Regional Economist at Moody's Analytics, who stated that “Any positive finding right now with Nevada — you take what you can get. I don’t have to tell you Nevada was one of the hardest hit states.”
And yet another course correction - coronavirus mortgage bailouts. By all statistics, it appeared that homeowners were stabilizing debt payments at the beginning of the month. According to new reports just released a few days ago, the number of active mortgage forbearance plans rose by 79,000 in the past week, erasing roughly half of the improvement seen since the peak of May 22. The number of forbearance claims has been suddenly increasing daily. As of last Tuesday, 4.68 million homeowners were in forbearance plans, allowing them to delay their mortgage payments for at least three months. This represents 8.8% of all active mortgages, up from 8.7% last week, and together, they represent just over $1 trillion in unpaid principal. If I had to take my best educated guess, these are good folks who’ve reached their wits’ end...the bottom of the savings account, the end of their patience and the last of their hope. They’re securing their deferment option while they can, as a last resort.
I’ve been writing about the changing dynamics of homeownership ever since we started this little project over three months ago, and there’s nothing more intriguing or closer to my heart. The Stay at Home Directive cultivated butterfly effects that are forever changing how consumers perceive their homes - another cultural and economic shift that’s course correcting our future enjoyment of property. The ripples are diverse and wide. People are longing for more space and a move to the suburbs (whatever that means to them and through their lens - that could be New York City to Las Vegas or Las Vegas to a small town in the mountains of Utah). People are working from home more often. People who own homes have become more attached to their space and have spent time and money on long, put-off improvement projects. Families are redesigning space or purchasing new homes to commune under one roof. People who simply didn’t believe in homeownership are now re-thinking the security of ownership over renting. To quantify these points, I’ll refer to a recent interview by Globest.com, wherein market and consumer researcher Teri Slavik-Tsuyuki stated that “COVID has made more than 45% of renters say they now want to become homeowners. In the West, this number is the highest in the nation at 49%. And this is the group most willing to make location trade-offs to do so–31% said they were very willing to move to a different or less expensive location in order to buy, which is 9% higher than the national response. There’s much discussion about urban versus rural living as a result of COVID and more permanent work from home opportunities. When asked if they would settle for a rural location if it improved their ability to buy, 38% of respondents in the West said they were very willing to do so, 5 points higher than the nation overall,” When asked what ‘home’ means as a result of COVID-19, respondents overwhelmingly identified three top terms: a safe place (91%), comfort (85%) and family (84%).
While new home builder permits are down approximately 50% from pre-pandemic times, builders are reporting an uptick in sales, despite the challenges of the pandemic. Builders closed 729 new home sales in May, which is down only 20% year-over-year, and I’d be remiss not to point out the flaws in that comparison. Buyers are typically in new build contracts for eight to three months, due to the length of construction. Many of the homeowners that closed in May could have been committed to those purchases last year, pre -pandemic, -social unrest, -economic -shut down, etc. While the number of new home permits glean optimism, the sheer unknown magnitude of the future financial woes of the economy brings skepticism and concern.
Our resale market continues to march forward, repeating the trends of last week. While Realtors are still practicing social distancing and reducing physical showings of property, it’s not inhibiting the want of the consumer to purchase, specifically in the median price range.
Flying off the MLS are homes listed between $300,000 - $350,000, and if priced and staged well, they’re selling with multiple offers within just days on the market. At this time, we still haven’t recorded increased values, but certainly the risk of doing so is highly possible, should we continue to run a shortage of housing inventory for a sustained period of time. Something has to give and it’s anyone’s guess what it will be. While we face enormous amounts of national debt and world market credit crunches, here locally, lenders are loosening the purse strings and finding ways to help homeowners. Will we soon see a course correction in housing? While we see glimmers of confidence and recovery in the housing market, without the financial lifeblood of our city’s revenue (tourism), it’s unknown how long we can maintain a perceived road of recovery, or if we begin to decline.
As we head into the week we celebrate America’s Independence and just what that means to me, I reflect on where we’re at, how we got here and where the heck we go from here, wearing our mandatory masks of course. The governor’s mask directive was by far the zinger of the week. With what seems to be about 50% push back on the validity of mask wearing, it already feels like the new “law” is causing a second economic shut down. There’s just no easy answer and a long road of recovery ahead. One of my favorite words in the English language is “grit,” which I think is needed now more than ever. So cheers to our “independence” and grit! With that, I wish you all a happy and safe Fourth of July and may we all stay #vegasstronger.
What are some of the high points of the Las Vegas growth story since Global Financial Crisis to early-2020?
Las Vegas growth had been organic and steady in the areas of employment, population, and household income. This was very healthy growth relative to the explosive growth that most of the Southwest had experienced in the early-2000s.
Prior to the pandemic, we were at historic lows in unemployment, with a great deal of growth in the healthcare, IT and other target industry sectors. We had also seen a resurgence in our Downtown area, which is a big focus for the Redevelopment Agency. We saw the underlying fundamentals of this growth as very sustainable in the long-term, and among the asset classes that performed particularly well were in the multifamily space.
"We have been rolling out programs to help businesses with financial assistance and allowing them flexibility while meeting public safety guidelines."
What has the City done in response to the COVID-19 pandemic in the areas of public health and safety and in helping local businesses that have been impacted?
Our efforts to help the business community have been a bit of a sprint and a marathon. We have been rolling out programs to help businesses with financial assistance and allowing them flexibility while meeting public safety guidelines. We had established the Business Protection Program, which provided grants to businesses for closing their storefronts and beautifying their temporary enclosures with artistic designs, as opposed to simply having bare plywood covering their windows and entrances. This was meant to send a message to the community that the closures were strictly temporary and that business would be coming back.
We also established a dining program which we called Dine-Out Downtown. Realizing that restaurants would need to cut their seating capacity, we set aside space in the public right of way, which restaurants could use for outdoor dining in the Entertainment District and Arts District.
More recently, we rolled out a Business Preparedness Program, whereby the City set aside $4 million of CARES Act funding to provide $4,000 grants to help businesses with reopening expenses, including items such as PPE, staff training and any health and safety-related reopening costs. We were able to extend this funding to just over 1,000 businesses.
Another objective is to build up the local supply chain of public health equipment so that businesses have access, especially if that chain is fragmented, much like it was during the shutdown. There are a number of discussions to build up our local suppliers here in Southern Nevada.
"This pandemic has been called the 'Great Accelerator,' and we may just see an acceleration of companies coming to the community as a result."
What is included in the City’s game plan to revive tourism back to 2019 levels?
That’s the most critical task that we’re working on now. We are able to control the supply-side of the equation, so to speak. Our resorts are leading the way in health and safety, and we are working with the Las Vegas Convention and Visitors Authority (LVCVA) to encourage tourism, such as with the “Now Open” campaign. The LVCVA has also released a Vegas Smart toolkit, which explains what hotels are doing to ensure the safety of visitors.
In the events and convention space, CES 2021 will likely be a bellwether for segment of the market. We are also working to support the brand new 300,000 square foot World Market Center and its grand opening later this summer. It’s likely that international travel will be down in the short-term, but we’re confident that we will see repeat, non-business visitors come back before we see convention goers.
Does the City have a plan to encourage the diversification of its economy, and what does that entail?
There are many businesses that are complimentary to our tourism industry, including gaming and equipment manufacturers. More recently, we’ve successfully brought in gaming technology companies into the region, who were attracted to the talent that was already available in the community. A big part of diversification is feeding off of our core industry, which is happening through UNLV and BlackFire. The same can be said about the growth of entertainment and sports, which we expect to have significant long-term growth.
Outside of our core, we are focused on these three industry verticals: healthcare and bioscience, IT and back office operations.
We believe that we have a great opportunity to attract this healthcare and bioscience thanks to our Medical District and the UNLV School of Medicine as our anchor. We are working on plans for a children’s hospital, which will join UMC and Valley Hospital in the vicinity. We classify this focus as academic medicine, which has the ability to attract a different flow of capital than traditional medicine. This includes money from the National Institute of Health for clinical trials and such. This initiative is also critical for keeping our healthcare spend within the community, rather than having patients seek treatment in neighboring cities. Healthcare also represents 25% of national GDP and tends to be very stable during economic slowdowns.
We have IT companies focused on smart mobility, smart cities and cybersecurity based out of our Downtown Innovation District. We continue to talk to companies about establishing their headquarters in Downtown Las Vegas and may have an announcement coming out very soon. We have a partnership with Startup NV, which is a statewide platform that supports startup companies in the state.
We are also focused on regional headquarters and back office operations. Rather than a traditional setting, we’re looking more towards an employee base that can telecommute. Las Vegas is competitive to other Western markets when it comes to cost of living – we’re 40% lower than Los Angeles and 90% lower than the Bay Area. This gives us an advantage in relocating knowledge workers in our community.
The paradigm has shifted from a decade ago, when companies established themselves to be close to supply chains or because they desired being a particular community. Today, they seek to locate themselves where there is a pool of talent. You see this with the rise of cities like Austin and Nashville, and we are certainly seeing the early-days of that growth here in Las Vegas. This pandemic has been called the “Great Accelerator,” and we may just see an acceleration of companies coming to the community as a result. One area we need to pick-up on is in urban living, which will attract this demographic. We are working on this at the moment and aim to boost multifamily developments for the foreseeable future.
What factors should out-of-state property investors and developers strongly factors when considering the City of Las Vegas for their next project?
There are obvious opportunities from the visitation market, but beyond that, the non-resort fundamentals are very strong. This includes the size of our population, which is equivalent to Charlotte and Portland. We also have 22 of the state’s 26 opportunity zones just in the Downtown area. The last 12-36 months have been very strong for multifamily and industrial, and we expect to see continued strength, followed by office and retail. I reiterate from previous comments that there is a supply gap in urban living, which developers should consider. We also have a number of financing sources that can be tapped throughout the state, which can help developers with much needed capital for projects. We are a region that has a plentitude of opportunities and it’s just a matter of getting the word out there.