Recession, Real Estate and the Domino Effect
Published March 16, 2020
The Macro View
The Micro View
Pam Junge, CCIM
Chief Adventure Officer
The Junge Group Powered by eXp
The Macro View
By David Grana
A recession is defined as a fall in GDP for two successive quarters. Though stocks are in bear market territory, we are not in a recession, but the probability of that changing is extremely high. The magnitude of the events of the past three weeks in the financial markets was felt in the real economy late Friday afternoon, as MGM Resorts began laying off staff from many of their properties. Sunday afternoon, both MGM and Wynn Resorts announced they were temporarily closing their properties.
Late March 13 article in the Las Vegas Review-Journal reporting the layoff of MGM staff.
Just a day prior to that, Norwegian Airlines opted to temporarily layoff half of its staff, and in the previous week, United Airlines delayed their next pilot training class because of flight cancelations related to the coronavirus.
When financial markets feel the types of shocks that we’ve seen over the previous three weeks, it’s only a matter of time before a domino effect begins. The big question that you have to ask yourself is, which domino are you in the long line of dominos, and will you be one of the dominos that tumbles?
Travel and leisure are one of the first economic victims of the coronavirus. Flight cancellations led to hotel and convention cancellations, which led to a drop in oil demand. And lest we forget cruise ship operators, who are undoubtedly in for tough times for the foreseeable future. Shares in all of these industries took a walloping over the past three weeks, while oil felt a precipitous drop, partly because of the spat that ensued between Saudi Arabia and Russia.
MGM Resorts and Caesars Entertainment have both seen massive declines in their stock prices.
How this affects the property industry is going to depend on a number of factors. The composition of the local economy and how it ties into travel and leisure is the most critical one. Employee layoffs, like the ones seen at MGM Resorts, are likely to ripple through all of these industries, which will hit those individuals’ bank accounts and their discretionary spending. Based on historical information from previous downturns, this could greatly delay any home buying or housing upgrade decisions by anywhere between six and twelve months. That timeframe will be completely dependent on the ability of the industry and the economy as a whole to recover. For obvious tourist economies, such as Las Vegas or Orlando, the effects could be felt quite deeply.
"Multifamily will likely see a boost as a result of the impact on these industries."
That said, as the housing market starts to slow down and days on market lengthens, prices may start to dip and create opportunities for buyers with more disposable income, or for investors flush with cash and in search of assets that could provide cashflow or capital gains. Short-term rental assets will also see a hit from the decrease in travel, which may cause some sellers to liquidate by accepting lower price offers.
Multifamily will likely see a boost as a result of the impact on these industries. Tighter budgets will likely make this an attractive alternative, until markets can recover. Higher end multifamily may see some difficulties if unemployment levels get too high in some regions and if income levels start to see a drop. Properties aimed at middle-income tenants should be better placed to weather the storm of economic turbulence. Multifamily, in many cases, has the advantage of making up a part of larger institutional portfolios, many of which have assets in multiple regions. Varying cap rates should be able to average out favorable returns for investors, assuming they have a decent spread of risk and are not too heavily dependent on tenants from one particular industry across all holdings.
It’s a little too soon to say what could happen to office space as a direct result of the impact on travel and leisure. This is mainly because long leases are likely in place, and there doesn’t seem to be any friction as of yet with tenants attempting to break them. This is something that will definitely need to be observed over the coming months, especially for businesses that are primarily or exclusively dependent on contracts with the travel and leisure industry.
The state of office assets could be in for a change in the coming months.
Retail may be buffered in the short-term because of lease agreements, however, stores that sell discretionary products may begin to feel the pain, especially in areas where the majority of the population derives their income from travel and leisure. Retail in tourist epicenters will certainly feel the squeeze, as declines in visitors will be evident, especially. Should this continue into traditional vacation season, we could see the number of tenants seeking to break their leases on the rise. Depending on the length and depth of the current economic shock, it may not be a matter of if pain will be felt in retail, but when.
Industrial tenants may feel some headwinds if their primary function is to supply the travel and leisure industry, however, many of these facilities can be repurposed with ease, especially with the continued growth of last-mile logistics and distribution. Supply chain issues may come into play, however, recent reports claim that many factories in Asia are back online and nearing full capacity. Nonetheless, it’s a factor worth monitoring. In more immediate terms, much of the panic buying that is being experienced across the country will bring the importance of industrial facilities to even greater prominence, as distribution facilities seek to stock up on goods in anticipation of further runs on certain consumer staples and medical supplies. And much like multifamily, many industrial assets are part of broader institutional portfolios which span multiple regions or cities. A lower cap rate in one city or region can always be buoyed by a higher cap rate in another.
The Shops at Crystals on the Las Vegas Strip.
I encourage real estate professionals to see what happens with these specific industries and how they affect your own market. There will undoubtedly be other industries that will be affected as part of the domino effect, and that will likely happen sooner rather than later. Keep a finger on the pulse and determine which domino you are as you maneuver through this rapidly changing market.
The Micro View
By Pam Junge, CCIM
Less than one (and incredibly long) week ago, I offered a few insights into the local Las Vegas real estate market amidst the uncertainty unfolding due to the pandemic and the economic factors threatening to change things as we know it. The dominos lined up and the pieces are starting to fall. We’re feeling the early effects of social gathering cancellations en masse, and quite quickly. Anyone with a Facebook account has probably seen a post on their feed about casino workers facing furloughs or layoffs. What’s most shocking is watching the city (of Las Vegas) shut down, as some of the largest resorts close their doors. In unequivocally necessary actions, every major gathering, from conventions to Strip performances to hotel restaurants, and even schools and religious gatherings are ceasing operations for at least the next two weeks. I’ve never known this town to NOT have a St. Patrick’s Day Parade, but that’s unfortunately the case this year. At a time when we were gearing up to host what was estimated to be 700,000 tourists for one of the most exciting NFL Draft parties to ever be thrown, we’re shutting down all tourism activities.
Resorts in Las Vegas have been uncharacteristically as a result of COVID-19.
It’s too early in the game to cite any credible real estate trends or valuation changes. We’re just at the tipping point of a shift in consumer confidence, along with and a hundred other factors that determine the outlook for the residential and commercial real estate market. Layoffs are definitely one of those factors. It begs the question of whether or not we will be able to quickly and gainfully employ those laid off resort employees, based on recent stats of a regional worker shortage. Time will tell. As of Friday of last week, massive amounts of refinance applications had forced banks and brokers to raise their rates. The Federal Reserve's surprise cut to zero on Sunday, along with its commitment to provide liquidity for the banking system should be able to alleviate some of that, as well as prevent a potential credit crunch.
The Federal Reserve cut rates to zero on Sunday, and pledged $700 billion for quantitative easing.
The residential housing market has been driving down the freeway at about 70 MPH for the last couple years. About six months ago, we slowed to about 50 MPH, but were still moving ahead. As of last month, the Greater Las Vegas Association of Realtors' Multiple Listing Service was showing about two months (or less) of inventory, based upon demand. We couldn’t have asked for a better starting point to enter a time of economic uncertainty. We have a bit of a buffer, along with several months, to regain footing and re-stabilize, assuming the coronavirus is under containment and the markets are correcting. Owning a home versus renting, especially in the median to average price range, is still more economical and sensical for most Las Vegans.
The commercial real estate market has been robust in industrial, warehouse and multifamily for the last several years. I foresee that trend continuing, and the demand should remain high, even in an economic downturn simply due to continued need for use.
There is an incredible amount of private capital waiting to re-enter our market. My phone is ringing off the hook with buyers looking for opportunities. This is very comforting and a simple math equation. If and when the market starts to subside and take a downturn, I’m hopeful that we can place that money in solid properties and stop the bleeding before it progresses into (heaven forbid) something resembling the crash of 2008. Investor faith in Las Vegas appears to be high and that may be our saving grace. If not for The Blackstone Group coming into our market around 2009 and purchasing 20,000 distressed SFR’s, as well as multifamily properties, we may have never recovered as fast as we did. We’re a stronger community than we were back then, with more opportunity for businesses and families alike.
What’s the most fascinating thing to watch unfold are behaviors and the shifts in how we do things. Technology has enabled a new platform to keep some companies afloat while shutting their brick and mortar office doors - the forced implementation of people-centric workplaces. With many in the workforce having been sent to work from home, what was once just a novel idea that was tested by few, may become the new norm as people and employers embrace this change. As global conferences have been cancelled, live streaming has instantly become a way to salvage at least some of the experience, and as a way to save the disruption of lost time. Much of the same has happened on a smaller level with religious services and other gatherings. I bring this up because, if the WAY we do business and conduct our everyday lives changes as a direct result of people-distancing collides with technology, we may be looking at yet another fundamental functional obsolescence of some types of real estate as we know it.
Investor confidence across all markets, like the one experienced by the S&P 500 last Friday, are critical for a quick recovery.
This is not a week-to-week or day-to-day situation. This is almost an hour-to-hour whirlwind of ups and downs. A bump in the road is inevitable, but a quick recovery is possible. Consumer confidence is key and investor confidence is pivotal. Stay tuned!
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