Velocity of Economic, Real Estate Shift Increases
Published March 23, 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
It’s been hard to keep track of time with the speed at which everything has been moving since the coronavirus began having a material impact on the U.S. Many forget that it was only a mere ten days ago that President Trump declared a national emergency. Since then, most of the country has shut down in some form or another. In fact, many countries around the world have taken similar measures, as they try to cut COVID-19 off at the pass. The main notable exception to these lockdowns is China, which is reporting a massive decline in coronavirus cases and an increase in manufacturing operations.
Las Vegas is among many cities that have gone on government-mandated shutdown since the outbreak of the coronavirus in the U.S.
Meanwhile, here in America, many industries have suffered early on as a result of the virus, including airlines, travel and leisure, restaurants and retail shops. In fact, most financial institutions project that around 3 million workers will be filing for unemployment over the next few days.
Last week, some U.S. manufacturers were the next to feel the blow of the coronavirus. Among them were all of the major auto manufacturers, who shuttered their operations because of the risk of the continued spread of the virus. While manufacturing only accounts for just over 10% of the U.S. economy, they are an important part of the industrial real estate landscape. This includes production and warehousing facilities, not to mention the distribution centers that are reliant on those goods funneling through their logistics network. The domino effect continues, and the industrial space looks to potentially be the next property type to be affected, albeit, this may be for the short term, as new safety procedures are introduced to protect facilities and their staff from continued spread of COVID-19.
There is, however, good news for the industrial sector out of all of this, and that comes in the form of scarcity of goods and the Defense Production Act. The scarcity of consumer staples, including food, paper goods, and cleaning products has had producers specializing in those areas working around the clock to meet increased demand. This is not likely to stop any time soon, especially as more states go on lockdown and individuals and families continue to stock up on goods for extended periods of self-quarantine. How long that is expected to last is anyone’s guess at this stage, but if we are in this for the long game, an increase in industrial property in conjunction with this space is very likely.
"Brokers focused on the industrial space would be wise to keep an eye on how this develops and how far the reach of the DPA will go over the coming weeks."
The Defense Production Act (DPA) was signed by Harry Truman in 1950, which gives the federal government broad authority to direct private companies to meet the needs of the national defense. It can also be used in times of domestic emergencies, such as terrorism and pandemics. President Trump has invoked the Act, and as of his press conference on Sunday afternoon, will be exercising it, albeit with a “light touch.” New York state alone projects that they have only 2-3 weeks worth of dwindling medical supplies to treat the rising cases of coronavirus, and this repurposing of manufacturing infrastructure could bring those producers back online. How easy it would be for, as President Trump suggested, General Motors to produce respirators instead of automobiles, is not really all that clear.
Hospitals in major hotspots for the coronavirus are dangerously close to running out of necessary supplies as cases continue to climb.
However, what is important to note is that the enforcement of the Act could give some manufacturers a much needed shot in the arm. As a result of this, a demand for production, warehouse, and distribution facilities are likely to be on the rise. Brokers focused on the industrial space would be wise to keep an eye on how this develops and how far the reach of the DPA will go over the coming weeks.
As quickly as everything seems to be moving, it should come as no surprise that some retail landlords are already hearing from tenants wishing to break their leases, claiming “force majeure.” With most of these businesses falling under the category of “non-essential,” they’ve had to close their doors and forego any form of income. This could take retail into one of two directions: landlords working with tenants to find a compromise or court systems flooded with litigation for the next 18-24 months. Expect to see more stories like this becoming commonplace in the retail property space over the coming weeks.
Prolonged closures could lead to leases being broken, prolonged litigation, and a drop in property values.
Though it’s painful to watch the stock and bond markets these days, it’s a key indicator of one critical factor in real estate: financing. The perpetual fall in equities and the flight to safety in fixed income (i.e. Treasuries) is forcing many institutional investors to unwind their positions in order to meet margin calls and to stop the bleeding in their portfolios. This means that they are dumping riskier assets, including mortgage-backed securities. The result is an increase in mortgage rates, and under current circumstances, even the pullback in lending by many institutions. Until markets begin to stabilize, expect financing to become more and more difficult as we get deeper into this crisis.
Investors have dumped investment grade bonds, in favor of short-term, highly liquid assets, affecting mortgage rates and availability of capital.
The Micro View
By Pam Junge, CCIM
Velocity. Simply put, the quickness of motion or action in a particular direction. Given the span of time between now and our last article, published Wednesday, March 18th, it’s fair to suggest that the impact that COVID-19 has had on the Las Vegas property market in those few days is equal to warp speed velocity. Pre-coronavirus, both housing and commercial real estate stood firm on solid ground, yet we find ourselves running straight into an economic quarantine. How quickly can the industry regain ground and recapture momentum after the world heals? That’s the million dollar question.
And while this article is geared towards property market reactions to COVID-19, it’s paramount to reiterate that this is not a housing or real estate pandemic - this is a health pandemic that has a domino effect on economics, jobs, small businesses, large corporations, people movement, the property market industry and, frankly, the world as we know it.
Retailers and small businesses are a vital economic engine in Las Vegas. With implications coming down on non-essential businesses that do not adhere to Governor Sisolak’s order for closure, they are panicking to find solutions to the loss of income and continued debt service to their landlords. This creates quite a conundrum when landlords are dependent on that rental income to service their own mortgage debt. Under the Stafford Act, President Trump ordered the SBA to provide Disaster Assistance Loans to small businesses affected by coronavirus, however, safety nets such as these are tangled, bureaucratic and difficult to navigate at a time when anxieties are already high.
Nevada Governor Sisolak ordered the closure of non-essential businesses, with the threat of potential fines and loss of license for noncompliance.
Nevada was one of the first states to receive these benefits. Such loans could be a lifeline to employers to continue to pay salaries and minimal operations whilst waiting out the storm, leaving them strapped with even more debt to service whenever the upswing comes. This may be offset with emergency tax cuts and savings in the future, but it’s surely muddy waters to navigate. Should tenants and landlords not find equitable solutions quickly, we will likely see a high rate of retail vacancy in the city in the coming months, with office space not too far behind.
Residential real estate continues to move forward, yet it is anything but business as usual. While there is no evidence or trend of decline in residential values, Showingtime is reporting an estimated 23% decline in house showings in the last seven days, coming at the onset of Spring, when volume typically ramps up. The number of pending transactions (properties accepting offers and entering the escrow process) is down roughly two thirds from the stats on the 17th. These hits stem from lack of people movement and sheltering in place, as much as general fear and uncertainty of layoffs and massive business closures. Open Door and Zillow put a pause on home buying, citing coronavirus concerns, which will likely push more sellers to the traditional open market for the time being. It’s important to note that we are still seeing buyers in the market taking advantage of low interest rates.
House showings (yellow line) have dropped significantly over the last week.
While conducting real estate has been deemed “essential,” in an overabundance of caution, the Greater Las Vegas Association of Realtors is prompting agents to cease all actions that would create the gathering of people or prohibit social distancing, such as open houses and driving clients about. We’ve seen a handful of houses come off the market from sellers concerned about having strangers in their home. Properties have become more than an asset to sell, and are now their safe haven. Technology is allowing some real estate to continue to transact through virtual showings, remote notarization, online closings and digital signings. Ancillary service providers (i.e. appraisers, home inspectors and repairmen) are operating on a smaller scale using social distancing and sanitization practices. We’re also finding, more often than not, that they are requesting that the homeowners not be present while they perform their services.
In what could be the biggest shock to Realtors and their livelihood is the fact that we’re already seeing cases being filed in California against agents, their brokers and sellers over the coronavirus. We are in the very early stages and these cases will undoubtedly continue to unfold, and agencies will adopt new procedures and contracts as a result. The creation of policy at a state and local level are already under way.
New home builders have been deemed essential and continue construction, which is keeping tens of thousands employed. We’re finding sales offices closed and offering model home showings by appointment only for the safety of the staff and the community at large. Recently, the Las Vegas Review Journal spoke with Nat Hodgson, CEO of the Southern Nevada Home Builders Association, who reported that nonessential staff who don’t have to be in an office are working remotely and reducing their contacts. In addition, workers in the field are keeping 6 feet apart to meet social distancing guidelines to be safe. Hodgson said some cities across the country are shutting down homebuilding operations altogether. He said that he is glad it’s continuing here, stating, “We just can’t shut down.”
“If you shut off homebuilding, it’s not just builders that would be harmed but employees and employers of subcontractors and those working for manufacturers and suppliers and delivery, and on and on. And, there are people (who) are counting on moving into their homes. If they don’t have a house, they could be homeless. We produce a large product, and everybody has protocols in place. We haven’t hit the panic button, and nobody is shutting the door on us,” Hodgson was quoted as saying in the article. He added, “Clark County and Henderson, Las Vegas and North Las Vegas continue to process plans from builders and conduct inspections. North Las Vegas has started doing inspections by video.”
Southern Nevada Home Builders Association CEO Nat Hodgson.
In closing, given the healthy economic environment of Las Vegas when we entered this global pandemic, we have a (very) small window of time on our side. Most homeowners sit comfortably in homes that have a bit of equity and affordable monthly payments. We were experiencing somewhere in the neighborhood of $40 billion in construction in the city with a shortage of workforce pre-COVID 19. The swiftness of fiscal relief is paramount. Food and water supply chains are improving. American ingenuity has reduced the wait time for the virus test from four days to 45 minutes.
There is a call to all mortgage servicers to automatically suspend payments for three months with one phone call. Student loan payments have been cancelled for 60 days. The SBA is providing $25,000 signature loans for business owners, and more if they can qualify for it. A bailout bill totaling almost $2 trillion will most likely be on the President’s desk for signature within 36 hours, which will provide 39 weeks of unemployment and numerous other benefits. We are living in a very powerful country. We will suffer losses and have rebuilding to do, but we have always been #vegasstronger.
Our community continues to come together in times of need. We’ve been forced to slow down. We’re forced to socialize with those we commune with on a different level. As fast as Las Vegans embraced technology to work and teach from home, social media would suggest there’s a more human element shift taking place. As of right now, it is unclear just how long the shelter in place initiative will remain, however, we’re in this together and we will get through it together.
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