The Macro View
By David Grana
I found it ironic that a couple of weekends ago The Perfect Storm was on television. The 2000 film recounts, in dramatic fashion, the true story of the Andrea Gail, a New England commercial fishing boat whose crew was faced with a difficult dilemma.
The tug-of-war between New York Governor Cuomo (L) and President Trump (R) on the handling of the COVID-19 crisis has become a daily theme.
After a successful expedition, their ice machine breaks down, leaving them with a boat full of a valuable catch and a short space of time in which to get it back to port to collect their bounty. Unfortunately for the crew, a storm stands in their path, which they can either sit out, letting their catch spoil, or they navigate it and risk a fateful end. They opt for the latter, traversing the maelstrom straight into the confluence of two storm systems and a hurricane - the perfect storm. Neither the wreckage of the Andrea Gail nor its crew were ever found, in spite of many valiant attempts by the U.S. Coast Guard. Today, they are honored, along with thousands of other sailors who have met their fate at sea on a memorial plaque in Gloucester, Massachusetts.
As the number of coronavirus cases multiply while the majority of the country remains in lockdown, one cannot help but feel like the crew of the Andrea Gail. Governor Andrew Cuomo of New York sees the apex of the virus arriving in approximately three weeks, which is around the same time that President Trump projects opening up the economy and getting the U.S. back to work. In the interim, we’ve seen the largest number of jobless claims since 1982, at 3.28 million, a precipitous drop in consumer confidence, and the future of the U.S. and global economy in question.
The $2 trillion stimulus plan that was signed by the President on Friday after passing a vote in the Senate and House, respectively, will certainly provide a much needed shot in the arm for the economy, but the effects for many will only be temporary. We are still navigating this storm, and the end is nowhere in sight. Many are talking about “when the economy comes back” without ever acknowledging what that timeline even looks like. There are also many that believe that the stimulus package is the ultimate panacea that will be the cure all for our economic woes. The main factor that many fail to consider is time.
Yes, the stimulus package provides a lifeline for businesses through lending programs and tax carrybacks. And in combination with the Federal Reserve’s asset purchase program, it eases the pressure on certain property owners from their mortgage obligations for a specified period of time. Much of that will require coordination between all of the parties involved in the complex business, lending, and landlord/tenant value chain. But more importantly, it’s going to require time to implement and to go through the plethora of applications, paperwork, and many discussions necessary to determine how this aid will be distributed and how these policies will be enforced efficiently and equitably.
"The coming storm will likely include a national unemployment figure in double digits."
While Congress had been debating the rescue package, many companies had already drafted their post-COVID-19 plan. This includes pullbacks of capital projects, revising revenue figures, cutting supply costs, and further layoffs. The coming storm will likely include a national unemployment figure in double digits. The state of Nevada, which is heavily dependent on the tourism and convention industry, is already there. It has been hit the hardest by the recent spate of jobless claims, and will likely endure more for the rest of 2020.
The economy and real estate will get back to a sense of normality when consumer and business confidence returns. Until that shifts, the key business buzzwords will be “non-discretionary,” “consumer staple,” and “non-durable.” Industries in this space will continue to thrive and they will become every real estate agent’s new darlings. When phrases like “Vegas vacation,” “new car,” and “bigger home” will become a part of our everyday lexicon is the big unknown. Unfortunately, the massive sell-off in financial assets over the last few weeks has wiped out a lot of wealth and left investors scrambling for cash.
Consumer staples are in the best position to weather the storm of the oncoming recession.
That led to the unwinding of many levered positions, leaving us all in a predicament that harkened back to 2008, where cash is the ultimate king. Until businesses and individuals can muster the ability to spend, we’ll continue to be in this position. The hope is that there won’t be too many more levered positions left to unwind. The sooner we can stem the bleeding, the quicker we can get to a path of stability and growth.
It’s not all doom and gloom. Retail properties may feel a bit of relief in the short-term, as small business loans start to get doled out. However, some companies simply won’t have the resources to endure the length of time it will take to receive those funds, leading to either mediation or eviction. That’s going to be a tough call for some landlords and businesses to have to make. Office landlords may also feel pushback from tenants who may not have had access to their building during a government-mandated lockdown or stay-at-home order. Both of these situations could end up being highly litigious, leaving the commercial-backed mortgage securities (CMBS’s) that are dependent on these streams of income in dire straits. This risk, along with current market conditions has left investors questioning if they even want to hold onto these instruments. In addition, many mortgage REITs have seen capital dry up from banks significantly undervaluing the CMBS’s in these portfolios and are requiring investors to put up more cash as collateral. The combination of all of these factors could leave large parts of the commercial real estate space without any capital to finance new deals, thereby prolonging the drought in business confidence.
President Trump has vacillated tremendously on the issue of the Defense Production Act. The latest is that he will use the powers of the Act to order manufacturers, such as General Motors, to produce much needed medical equipment to ship to states that have been heavily impacted by COVID-19. We’re all still on pins and needles waiting for this mass, wartime production switch to be flipped. If and and when it does, the industrial space could be pushed to its limits. Until then, it’s status quo for this asset class.
Lastly, the term “force majeure” keeps popping up in conversations in the context of both residential and commercial properties. Whether or not COVID-19 is considered force majeure will be up to the courts to decide. Until they open up again, the real estate world may have to contend with a perfect storm of lengthy conversations with lawyers, threats of litigation, and buyers possibly walking away from deals.
Strap in everybody! Rough seas ahead!
The Micro View
By Pam Junge, CCIM
What day is it? Who am I? How long have I been wearing these sweatpants? These are likely the questions on most people’s minds today. In one short, yet seemingly long week since our last article, the severity of the pandemic may just be sinking in for some. The memes are becoming just a bit less comical. Homeschooling posts are more of a call for help than the exuberance and fun they once displayed. Anxiety rears its ugly head between the prayers and #vegasstronger posts. The city continues to suffer more layoffs and the coronavirus numbers continue to climb. Let’s take a look at the latest news and what we can possibly deduce from it.
While a record 3.28 million Americans file for unemployment, the full scope of the damage is yet to be understood locally. Hundreds of thousands of tourism industry workers sit home, either furloughed or laid off, and waiting for the other shoe to drop. MGM Resorts alone currently employees roughly 80,000 Las Vegans over their impressive list of properties, including the Bellagio (which, in a very recent play, was sold to private equity behemoth Blackstone Group, who leased it back to MGM Resorts International), City Center (50% joint venture with Dubai World), Excalibur, Luxor, Mandalay Bay, MGM Grand Garden Arena, The Mirage, New York New York, Park MGM, and T-Mobile Arena (42.5% ownership stake.)
Source: Gaming Today
In a compassionate display, acting-CEO and President Bill Hornbuckle addressed his employees through a video message last Thursday, reminding them that, “Each and every day YOU, our MGM employees, welcomed thousands of guests through our doors, doors that were never built to be closed.” But closed they are. According to an article in the Las Vegas Review Journal on Friday, MGM feels they are going to be able to weather the storm and the impacts of the pandemic. In the statement, MGM said its balance sheet has approximately $3.9 billion, including the money drawn from its credit facility. “With the continued execution of the MGM 2020 plan, as well as the implementation of aggressive cost savings initiatives, we believe the company will be able to manage its expenses while navigating this unprecedented event,” the company said in the filing. Gaming industry analyst Carlo Santarelli of New York-based Deutsche Bank said MGM is employing a solid strategy. “In a no-revenue environment, to preserve liquidity and stretch out one’s ability to remain solvent, reducing those operating expenses as much as possible is the only decision, which is why every gaming operator has taken that approach for the time being,” he said.
Other companies have similar, but varied strategies. The more human element question in all of this is - how long will it take after the doors re-open for people to feel “safe” enough to walk through them again, after a health scare of epic proportions? How long before they will fill our casinos, restaurants, night clubs, pools and showrooms and generate the revenue and lifestyle Las Vegas have become accustomed to?
The residential real estate market continues to remain “on hold.” As reported in previous articles, this is by no means a re-run of 2008. Most mortgage holders are rapidly implementing payment forbearance and deferment plans for homeowners affected by the pandemic. Time will tell if these lifelines, coupled with stimulus incentives, will be enough for those most severely affected to hold onto their homes. We do expect a bump in resale inventory in the coming months, however, to what extent it will affect the market and property values, no one knows yet. Builder pullback will see their immediate inventory (and resale competition) subside. We are still technically experiencing a housing shortage. Those that are forced to dispose of their homes due to financial hardships are much less likely to strategically default on them, which was a wildly popular exit strategy a mere ten years ago. Unlike back then, most people today are sitting on equity.
Although they may not be able to afford the monthly debt obligation, they likely have built up enough in their home, which will garner proceeds to support them in moving on. Again, this all lies on the timing and success of eradicating the virus and implementing the stimulus package, or the lack thereof.
The Las Vegas industrial market, incredibly well poised pre-coronavirus, may be the one benefactor of the pandemic. This market sector gained its footing in 2015 and, despite a massive amount of new construction, demand has consistently outpaced supply. The result has been historically low vacancy rates, hovering around 3.5%. While the traditional epicenter of the distribution hub was focused around the Strip to support multiple daily deliveries, growing pressure supported expansion to the north and the south.
Thanks to social distancing and sheltering in place, the demand put on e-commerce shopping sites has increased warehouse needs and may have just pushed consumers into the tailwind of online shopping a bit faster than may have otherwise occurred organically. While some tenants will inevitably suffer temporary financial hardship, industrial has always been the “favorite child” of savvy real estate investors for the sheer fundamentals of the asset class.
Perhaps those on the most shaky ground at the time would be out-of-work renters living paycheck-to-paycheck. While Governor Sisolak promises to put safeguards in place, tenants continue to get bullied by landlords demanding that rents get paid on time. Right now, what is most critical is to keep people where they are - sheltering in place. Massive movement in the city at this time could be devastating and wildly increase the spread of the virus. Although a stay in evictions is a nice gesture, it’s hardly comforting to know that the second the injunction is lifted, tenants will be served with eviction papers, and likely still not have gainful employment. It's estimated that 45% of Las Vegans are renters, and unless handled swiftly, with rent due in just a few short days, abuse and confusion will continue unabated.
Source: Nevada Current
Can you say stim-yuh-luhs?!? Yes! The stimulus package has finally been approved and now the burden of comprehension and fulfillment from the corporate to the individual level begins. While this is probably not a magic pill that will fix our economy overnight, it’s a fundamental step in the right direction. Action plans will inevitably be rolling out through banks and government officials, however, it is urged not to wait. Be proactive, get educated and take advantage of any lifeline available to keep businesses afloat and people in their homes. The incentives range from SBA signature loans to tax-exempt IRA withdrawals to self employed CARES funding, and so much more. On a grander scale, this gives our city a fighting chance to breathe until the day we can open up for business again.
While the coronavirus pandemic is ravaging the global economy, we’re already seeing evidence of how it will forever change the way we live and do business. Courts will be wrought with cases of contract rescission due to claims of force majeure. The business and liability insurance industry is spinning to cover themselves and, undoubtedly, course-correcting future policies. Virtual notaries, although approved in most states years ago in spite of neither existing, nor being embraced by the industry in many regions, are now used on a daily basis. And perhaps, just perhaps, people have developed a new found love for washing their hands and respecting others’ space.
All expectations point to a rough couple weeks ahead of us. Confirmed cases will continue to rise while our city infrastructure is continually put under tremendous pressure. The walls in our homes may start to feel like they’re caving in on us and hope may dwindle. Hang in there! Stay the course! We will get to the other side of this like we always do.
We are in it together and will always be #vegasstronger.
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