The Macro View
By David Grana
Having watched Thunderball two dozen times on the Pluto TV James Bond Channel (NB: props to Timothy Dalton and Daniel Craig, but Connery will always be my favorite Bond), I decided to see what YouTube had to offer. I came across Michigan science professor Nick Lucid’s channel, The Science Asylum. Lucid explains scientific concepts that are well above my pay grade, such as relativity, black holes and the speed of light, frequently having arguments with a “clone” of himself in a display that toes the line between insane and humorous.
YouTube personalities such as Nick Lucid have been providing entertainment for many during the economic lockdown.
This better explains why it’s called The Science Asylum. I’d like to follow Lucid’s lead this week - not by cloning myself - but rather by playing devil’s advocate and throwing some valid arguments to my views of where the economy and real estate is headed as communities begin to open up.
The stock market is doing great!
It is, indeed! In fact, the Dow was riding high on February 19, closing at 29,348, before hitting its nadir through this crisis at 18,591 on March 23, and then bouncing back to a range just north of 24,000 in the past week. The recovery seems so good to be true that it actually is. Here’s the disconnect that many observers are missing: oil companies drill for oil and investors invest in assets. However, when investors get crowded out of the market by a large player that prevents price discovery and potential gains, they take their ball and play in another schoolyard. This is what happened when the Federal Reserve expanded its balance sheet to over $6 trillion by acting as a backstop for a plethora of fixed income instruments, including Treasuries, MBSs, and CLOs, among others. Investors decided to step away from the artificially-boosted bond market and plugged their money into the only other place they knew - the stock market. This is not to say that we won’t see another major stock market decline over the next 12-18 months, but the life support provided by Federal funding and its impact on security prices does not provide an accurate picture of the real economy.
The Dow Jones Industrial Average has made a swift near-recovery since the pandemic hit our shores.
Most jobs are coming back soon!
I could only hope that this was the case. As you all have read, 20.5 million jobs were lost in April, with over 33 million lost over the past 7 weeks, leaving us with a provisional figure of 14.7% national unemployment. I say provisional, because there are many people that have yet to file for benefits. Many still haven’t been successful in applying because of the mass deluge in applicants, or because their states have not yet rolled out filing for independent contractors or gig workers. While it would be safe to say that these are just temporary layoffs, the majority of them came from the hardest-hit industries, with leisure and hospitality, professional services and retail making up three of the top four.
The uphill battle for hotels, resorts, theme parks, entertainment and cruise ships goes without saying. Las Vegas has no timeline for the opening of their resorts, and until such time, employees will either remain furloughed or be laid off. Several casinos announced layoffs for furloughed employees, with more in the pipeline. And with business travel on pause, and family incomes gone or greatly reduced, travel and hotel will continue to experience a massive slowdown, meaning less staff needed to run those businesses.
The retail sector has seen a spate of bankruptcy announcements in the past week, including Neiman Marcus, J. Crew and JCPenney, with rumors of many others in the pipeline. Even post-restructuring, these stores will not be hiring back all of their furloughed employees. In fact, workforce numbers for these businesses will drop dramatically. Some small businesses have had a difficult time through the COVID-19 crisis and may not open back up at all. With operational costs on the rise, some businesses will opt to shut down altogether. Just in Nevada alone, nearly half a million people are employed by small and medium-sized businesses.
The ISM nonmanufacturing index showed its first decline since December 2009, and its lowest level since March 2009. Although this does not indicate that this figure will be permanent, it does show the severity of the impact of the shutdowns, and that it will be a big hurdle to overcome in order to get anywhere near the pre-COVID-19 numbers.
The ISM Non-Manufacturing Services Index dropped to levels last seen during the Global Financial Crisis.
"The downward trajectory of asset prices and rising cap rates are an indication that we are in the beginning stages of a correction."
House prices are going to rise because demand will be through the roof!
There are many caveats to that statement. First and foremost, it depends on the location. I hear this comment from many West Coast-based residential agents and I have to explain the fact that, barring San Francisco (and possibly Seattle), we don’t necessarily have the same set-up as East Coast cities. As a former-bridge and tunnel person that was living in New Jersey and commuting into New York, I can attest that workers either lived in densely populated buildings in the city, or commuted from bedroom communities. Many US cities, particularly in the western part of the country, are essentially urban sprawl, without the density levels anywhere near that of Manhattan. To say that bedroom communities outside of densely populated urban centers like New York, Chicago or Washington, DC will see a boost is highly likely. Will cities like my own home of Las Vegas, or Dallas or Phoenix see this? Not likely. You just can’t compare them.
Apples and oranges: Dallas (left) and New York will represent a dichotomy of demand for residential real estate.
Things will get back to normal soon!
Again, I have my sincere doubts. Last week, distressed real estate investor Sam Zell opined that we will all be scarred by this experience in some form or another. He sees this altering the way that many businesses and individuals function in the world. This includes spending habits, attending large gatherings, travel, etc. I half-agree with Zell. There is likely a 50/50 split among consumers and businesses, with some making voluntary changes, and others more so because of regulatory obligations. The societal debate around COVID-19 and how much it should influence our lives is quite palpable and will undoubtedly continue until the situation gets fully under control.
Distressed real estate investor Sam Zell.
Further to his comments, Zell expressed concerns around an oversupply in commercial real estate, particularly in the retail space. The downward trajectory of asset prices and rising cap rates are an indication that we are in the beginning stages of a correction. The rising number of retail bankruptcies will mean lower demand for real estate. And if Zell is correct about a more careful, COVID-centric approach by businesses, it could render some properties in their current state redundant.
Green Street Advisors Commercial Property Price Index
All Property CPPI weights: retail (20%), office (17.5%), apartment (15%), health care (15%), industrial (10%), lodging (7.5%), net lease (5%), self-storage (5%), manufactured home park (2.5%), and student housing (2.5%). Retail is mall (50%) and strip retail (50%).
Core Sector CPPI weights: apartment (25%), industrial (25%), office (25%), and retail (25%).
The layoff announcement from Airbnb last week signals as much for the residential space, and it is likely to continue onwards into the office space, and quite possibly into multifamily. What is irrefutable is that the world continues to shift into a new and unimaginable paradigm.
The Micro View
By Pam Junge, CCIM
Shift happens. We remember all too well the last economic shift, which led us into the Great Recession of 2008. That shift was caused by a series of related economic disasters (mainly mortgage-backed securities) that hit the American and European financial systems, causing a burst in the housing bubble so ferocious that you could swear you heard a sonic boom from the shock waves. And while economists have been predicting a recession in 2020, none could quite articulate the “why,” other than, “it’s time.” Perhaps Mother Nature heard their cries and said, “Hold my beer.”
Governor Sisolak surprised the city last week by announcing the early shift into Phase One of the Roadmap to Recovery. The unexpected move by the governor left business owners scrambling to make a quick decision. While we said goodbye to our beloved Ricardo’s Mexican Restaurant (a forty year Las Vegas staple) last week, we also heard from the owners of Weiss Deli, who said that reopening under Phase One guidelines was worse than not opening at all. Owner Michael Weiss stated that he’d be hard-pressed to get a waitress to give up unemployment for waiting on three tables and added that he’d suffer the added costs of sanitization and occupancy control. As a result, he made the difficult decision to remain open for take-out only. News 3 reported last week that two companies and three individuals, including a doctor, have filed a lawsuit against Governor Sisolak and several key state officials for the stay-at-home directive issued in March.
Family-owned Ricardo's Restaurant is likely among many of local businesses to shutter in the aftermath of the COVID-19 pandemic.
The complaint, filed Thursday, alleges the plaintiffs have all suffered significantly due to the state's closure of non-essential businesses, among other emergency orders issued. Orion Star, a photography business based in Las Vegas, claimed that they could have safely operated their business within the CDC's guidelines. Our court systems will inevitably be wrought with cases like this for years to come.
Other businesses eagerly opened under the restrictions and there was a new vibration we haven’t felt in the city in months. Although the rollout is limited, let’s face it - Saturday brought about the ability to get a haircut and have a meal out with the family. It was just the emotional and psychological shot in the arm most of us needed. While faced with the “new normal” of mandatory dining reservations, masks, 50% dining capacity, waiting in your car for service and curtains between hair cutting stations, we relish the freedom of moving about. The majority of businesses are still shuttered, with expectation of moving into Phase Two near the end of May. Most of our larger resort owners are implementing plans of staggered reopenings as far out as the fourth quarter, while Stations Casinos has announced the intended sale of its two newly remodeled properties, The Palms and Palace Station.
The Palms Resort
While the number of unemployment claims were down last week overall, we have to ponder - how many sectors have left to apply? Though the shutdowns came fast and furious, the bulk of the layoffs came in tranches through our major employers. With that being said, what is the reality and likelihood of those left without jobs getting rehired in the near future? The answer lies somewhere tangled in a web of stimulus obligations, new government guidelines, business restructures, the hastening of artificial intelligence (AI), the return of confidence in tourism and the reinvention of a town that was built on uninhibited fun and excitement. The COVID-19 pandemic has edged out an era wherein economists could neatly graph out a recovery, and has left us with a lot of questions.
Businesses have had to take new measures for reopening in the new normal.
CNBC recently reported that more than 18 million workers described themselves as being on temporary layoff, with expectations of returning to work within six months. Bloomberg quickly debunked those hopes, referring to it as the “silver lining.” Major cities across the globe are in the process of taking out up to 40% of all lower income jobs with AI, such as Pittsburgh International Airport. It became the first U.S. airport to deploy autonomous robots that use ultraviolet (UV) light technology to sanitize surfaces and prevent the future spread of the novel coronavirus.
Autonomous robots have been deployed in Pittsburgh Airport to sanitize the premises using UV lights.
Just last month, Anaheim, CA-based iinside unveiled technology powered by LiDAR from Quanergy to monitor and analyze crowd density in high-trafficked buildings, including airports. While these technologies were a thing of the future pre-coronavirus, they have suddenly become the now. It’s an organic and necessary progression of technology that will be quickly consuming jobs that were once performed by a face with a name.
Mortgage forbearance continues to surge nationally, but has slowed down week-over-week. Nearly 4.1 million homeowners are not making their monthly mortgage payments, and ironically, a recent poll indicates that a majority of those in forbearance did, in fact, receive a stimulus check. Perhaps, as reported in weeks earlier, the money meant to tide over out-of-work Americans came too little too late. While a low to middle income family of four could possibly receive $3,800 in a one-time payment, it appears that there were other debt obligations, or perhaps just essentials, such as food, that claimed the funds first. “What remains an open question at this point is to what degree forbearance requests will look like at the beginning of May — when the next round of mortgage payments become due, and with nearly 30 million Americans newly unemployed in the last month,” said Ben Graboske, president of Black Knight Data & Analytics in a recent report by CNBC.
The local property market remains on pause while the new coronavirus economy continues to be a gigantic experiment in shaping how we live and work. While we see rents in the city decline, we experienced a bump in Q1 multifamily sales. Most reports indicate an 18-month recovery in this sector, with a possibility of it happening sooner, assuming a surge in need from distressed property owners. Retail and office are facing three years of recovery, with the harsh reality that a lot of businesses won’t be coming back. Office has to completely reinvent itself, from HVAC systems to easily cleanable furniture to safer common kitchens and bathrooms. How much office space demand there will be in the new normal is still a big question mark, along with the additional square footage required per employee. While many are reporting office space is a thing of the past and that Zoom is the future, others are taking a more visionary “let’s wait and see” approach to the outcome of how we conduct our future business operations.
Take for example the events of 9/11 and the fear of people never going back into a tall building. Fast forward years later, and lo and behold the glimmering New York City skyline with its new additions, including the Freedom Tower. We can also look as far back as the Roaring Twenties - a period of consumer growth and utter exuberance - which came on the heels of the Spanish Flu and the 65 million deaths of that global pandemic. Perhaps it’s too early to see exactly where the chips will fall, but we can gleam hope on the horizon as the fear factor disappears, the lockdowns end, and we become a safer and stronger city, nation and globe.
Our residential market sits at approximately three months inventory today. ShowingTime is reporting that the showing of listings is down over 40% from this time last year. Last week’s recorded sales dropped an estimated 33% week-over-week, down to 431 from 646. All other numbers are status quo amid coronavirus conditions. New listings were up only slightly, while the number of those contracted is practically a mirror image week-over-week. The disparity between negotiated contracts and actual closings could be affected by employment. Those furloughed buyers banking on getting their job back are staying in their transactions. Lenders have adjusted guidelines for these extenuating circumstances and all a borrower needs is one paycheck since rehire to regain qualification. We may begin to see a larger number of cancelled transactions in the near future from this type of fallout and the reality that not all jobs are immediately coming back. All in all, homebuying confidence remains a strong element even during these trying times. A home is the foundation of a life - the foundation of a family - and the stability of owning versus renting will typically win with low interest rates and affordable housing.
I would be remiss not to point out that while we jokingly reported a Nike Swoosh-shaped recovery in the commercial real estate market a few weeks back, which has been officially proclaimed by CBRE nationally just last week. But remember, you heard it here first. Stay tuned as we continue to move through these economic and mindset shifts and feel our way through this new world. We can only hope and pray to have half as much fun as they did in the days of the flappers when we come out the other side of this. Shift happens. Stay safe and be well. We are #vegasstronger.
What impact has COVID-19 had on the future of the film industry?
When one door closes, another one opens. We’re seeing new potential opportunities and that time is speeding up. Changes that may have been developing over a 10-year horizon seem to have shifted to a 2-year horizon. The demand for content is greatly increasing with the rise in consumption. Social distancing has accelerated this phenomenon.
"The movie theater industry is unlikely to disappear into the abyss, but what they end up doing with these facilities is going to be dependent on human behavior."
The question of how individuals will want to consume content is a big unknown at the moment. The popularity of movie theaters may change, which will undoubtedly have a major impact on industry as a whole. In fact, Warner Brothers recently released the Trolls sequel on a streaming platform, as opposed to in theaters. They had a successful $100 million run in the first couple of weeks of its online release, which is greater than the first film’s earnings over the course of 5-months back in 2016. This experiment demonstrated that the movie industry can survive in the era of digital streaming. Again, what happens to movie theaters if this shift becomes more pronounced?
Productions may stay closer to home because of travel restrictions and safety concerns from their respective crews. This may increase demand for stage space, which is already in short supply in Southern California. We’re already experiencing an increase in productions being moved to Las Vegas because of this facility demand. The current pause in production, along with the increased demand for content, will add to the current bottleneck that the industry is facing. That begs the question how Las Vegas will compete for that accelerated demand.
As we continue to experience this increase in demand and the changes in the how we produce content, we will need to step up our game and create more infrastructure to meet the needs of the industry.
What do you see happening to existing movie theaters?
The movie theater industry is unlikely to disappear into the abyss, but what they end up doing with these facilities is going to be dependent on human behavior. If movies start going direct-to-streaming on a regular basis, then that leaves large, empty real estate that will need to be redeveloped. What they turn into is anyone’s guess, but perhaps they turn into some type of creative space for industry professionals.
"The ability for Las Vegas to facilitate the creation of content
at every level is more critical now than ever."
What can we build here in Las Vegas to drive revenue from the film industry?
I constantly go back to a Plato quote, “Those who tell the stories rule society.” Now, more than ever, the storytellers are critical. This is especially true in a world where we are inundated with media. As a community, we need to empower content creators so that they can export those stories to the world at large. This is our story, and we are the best ones to tell it.
This means that we need facilities with the necessary equipment for the whole gamut of content creators, from YouTubers to local media organizations to entertainers. The ability for Las Vegas to facilitate the creation of content at every level is more critical now than ever. We need to get that message out to the world, but we cannot do that without the necessary infrastructure.
Where will funding for these facilities likely come from?
More immediately, it’s more than likely going to need to come from local investors and developers. Another possibility is that large production companies, such as Netflix, may develop regional facilities, just like they’ve been doing in other parts of the country.
How might changes to entertainment on the Las Vegas Strip affect content creation?
Visitors come to Las Vegas for the stories. We will continue to facilitate that, however, it may mean that, in addition to live shows, we may have a digital option that will be either live or recorded for viewers around the globe. How that affects tourism is an unknown factor at the moment. Regardless, every indicator leads me to believe that we will be producing more content to meet the increased demand.
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