Published March 12, 2020
Coronavirus, Financial Markets, Real Estate
By David Grana, Managing Director, Vegasnomics
It’s official. Stocks have entered bear market territory in historic fashion, taking a mere three weeks. What was initially perpetuated by the fear of fractured global supply chains and a drop in international travel has led to a spat between Saudi Arabia and Russia over oil production and now threatens the world with a possible recession, as governments scramble to contain a pandemic. This plot line seems so outlandish that you couldn’t be blamed for thinking that it’s the biggest box office disaster of the summer. We could only be so lucky.
The World Health Organization declared the coronavirus a pandemic on Wednesday.
Up until yesterday’s announcement by the World Health Organization, empty supermarket shelves were more a sign of concern for people’s sanity (and the perfect subject for internet memes), rather than a sign of peril. Now what? Buy more toilet paper?
The next 30 days will be nothing short of…”interesting.” It will seem like the U.S., and the world, will be on pause…or something like that. Business will still function, but it will just be different. Office parking lots may be emptier than we’ve ever seen them, there won’t be NBA games on TV in the evening, and we will have to adjust our lives accordingly. This is going to be a very different world, and we will just need to adapt.
"We may likely start to see banks pull back from lending, particularly for riskier borrowers and assets."
So what can we expect?
We may likely start to see banks pull back from lending, particularly for riskier borrowers and assets. Markets will try to find a bottom and high-grade bond yields will likely continue to drop, possibly going into negative territory. If oil stays at current prices, defaults in that sector are inevitable. The President’s pledge for small businesses through SBA loans will be helpful, but it’s still possible that the Federal Reserve and other central banks around the world may start a round of quantitative easing. On the manufacturing front, it will take a while for supply chains to get back on line. While doing so, we may see scarcity of certain goods, and possible price increases.
Chinese factories will need to get back on line in order keep the global supply chain intact.
Where consumer confidence goes is anyone’s guess, but something that we should all be paying attention to. Consumer staples, hopefully in strong supply, will still flow, but discretionary goods may not. A lot of this is dependent on the unemployment situation, which is currently at a 50-year low. Similar to what we saw in the post-Financial Crisis era, our homes may become an even bigger part of our lives. Home deliveries may be on the up and up, along with on-demand-type platforms.
"There are a lot of investor dollars in the market right now, and they’re hungrily looking for yield, especially with their equities portfolios taking a beating."
Where is real estate headed?
It’s difficult to say right now, but one thing is for certain: cash is king! There are a lot of investor dollars in the market right now, and they’re hungrily looking for yield, especially with their equities portfolios taking a beating. The key for them will likely be to spread their risk exposure. A lot of industrial and multifamily property portfolios tend to have assets in multiple markets, which helps them cushion cap rate fluctuations. If home lending tightens up, multifamily vacancy will very likely drop, especially in markets that haven’t been too heavily impacted from possible economic sluggishness. I’m particularly keen on industrial property, mainly because I don’t see home delivery slowing down anytime soon, regardless of economic conditions. The supply chain issue may be shaky in the short-term, but the long-term prospects of industrial real estate looks good.
Even in the face of economic headwinds, industrial real estate still looks appealing.
There’s been a short supply of housing in this country since the Financial Crisis. Demand is strong and, economic situation withstanding, will continue to be so, at the right price. If there are buyers with cash or finance, residential will be coveted.
It will be interesting to see what happens in office and retail. People have been looking for the next big thing in both of these asset classes. What ultimately will move the needle for both will be the economic situation in the aftermath of the recovery from the coronavirus. Office tenancy varies from market to market, so a lot of it will depend on the types of companies that are attracted to it. Also, many companies have downsized their operations and rely more so on shared office environments. The coronavirus may shift that mindset.
On the retail front, many markets have shifted away from big box, which have credit backing, towards smaller businesses, who need to show landlords cash in the bank. If these smaller companies are adversely affected by the coronavirus and this cash disappears, this may be challenging. It is possible that retail properties could change their requirements in the short run, should we see adverse economic conditions and difficulty in leasing space.
What does the timeline look like?
It’s difficult to say just how long this situation will last. Coronavirus is definitely not a flash in the pan, but it could also be an event that lasts weeks or months and then dies down in the U.S. The response to it could be effective, especially with the additional travel ban and the cancellation of certain events in the short-run. That may be enough to greatly reduce the spread. Ultimately, the two main factors that will determine in which direction financial and real estate markets go, will be the state of the supply chain and consumer confidence. If we can fix the former and sustain the latter, we should be able to ride this storm. That’s not to say that there won’t be loss, but it won’t be cataclysmic.
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