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The Impact of Coronavirus on Real Estate

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Our economy has faced some challenges in the past, with the most recent coming in 2008. We learned some lessons then that will apply as we deal with the consequences of fallout from the novel coronavirus.

We potentially could be on a lockdown for the next four to six weeks. It's important that we all brace for financial hardship at least for the next 90 days.

You're going to start to see a ripple effect of more stores closing during the lockdown. Unemployment is very high already and it's projected to go up to between 20 and 30% over the next few months.

If the projections come true at 2 million cases in the United States in a four- to six-week period, that's going to create a lot of disruption in the economy.

There are two things happening right now. One, we are definitely in a recession. What the government's trying to do is they're trying to stop a depression, which is a much longer period of time.

There are three uncertainties to discuss:

  • The depth and length of the recession.

  • Monetary policy and the liquidity by the Federal Reserve.

  • The impact of the financial stimulus.

The businesses that I see that are impacted the most are the airlines, lodging, retailers and energy.

The airlines are facing potential bankruptcy. Obviously, they rely on people buying tickets and flying everywhere. Then, of course, they're buying planes from manufacturers like Boeing.

Boeing, coincidentally, just drew $19 billion on its line of credit two weeks ago.

You're going to see big companies like American Airlines, Boeing, Marriott and Hyatt have serious financial hardship over the next few months. This will affect their employees, who rent from us, who refinance and get mortgages. Those people are going to hunker down and save whatever cash they have.

The last estimate I looked at showed that half of Americans have only $500 in savings or less.

It's really important that landlords or stewards of real estate keep that in mind and that we have some empathy and compassion for these people.

There are three things that drive real estate:

The first one is job growth, which is contracting. If you're in any kind of those service businesses, like a restaurant, you've probably already gotten laid off.The person who owns that business is in trouble. We don't know when those things are going to come back. So, job growth is a big part of why real estate continues to grow.

The second factor is population movement. A lot of Baby Boomers were retiring or moving to Arizona or Florida; most people that were relocating for retirement or jobs have reversed all of that.

In terms of financial stimulus, the Fed has done a great job on cheap money. Very, very low interest rates are now even lower. They want money to start moving into the economy. Cheap money could help a lot of people.

What we need is more liquidity in the system so that small businesses and people can actually get that money. That's why President Trump was talking about this $1,000- or $1,200-per-person check. It gives the economy a short-term jolt over the next couple of months.

In the short term, I see my tenants having a real hard time being able to pay rent for the next 90 days. As a company, we're also hunkering down.

We're going to try to work with everybody that we can on a case-by-case basis.

Communicate to your tenants, investors, landlords and employees, no matter where you are on that spectrum because transparency is super important right now.

Our goal is not to displace anybody from their homes while they're going through this. The challenge that we owe somebody above us.

I suspect we'll see some fiscal stimulus and leniency on the bank side because the banks do not want this real estate back. I went through this in 2001 and 2008 when we bought a lot of real estate back from the bank.

On the multifamily side, if you bought something that was a big value-add play and you closed on it within the last six months, you're in trouble.

As a company, we stopped all value-adds, renovations and upgrades temporarily to find out where we are. We're just trying to be heavy in cash because that's who is going to survive.

If you have a vacancy, it's going to get worse. You’re better off to have a good tenant in there and work with them.

If your business was based on hype or getting people together to raise capital, those days are over.

As Warren Buffet said: You really find out who's naked once the tide goes out. Right now what's happening is the tide is definitely going out.

Remember, everybody's scared too. We'll all get through this together.

Original publish date: May 13, 2020

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