A once-lucrative market is in the throes of COVID-19 confusion

Once upon a time—2019, to be exact—real estate experts were touting the stability and strength of the off-campus housing market. Long overlooked, the student housing sector was enjoying tremendous growth—reaching an investment volume of $11 billion, a number which had “more than tripled since 2014.”

The great appeal of entering this sector comes down to two key items. First, the variety of properties, from single condos and duplexes to multi-family properties, means there is something for every investor level. Second, off-campus housing has a history of stability. University enrollment tends to remain consistent in times of market volatility and during economic downturns.

As long as there are students, there is always a need for housing.

When the economic hiccup is pandemic

Experts could never have predicted college life in 2020 and the drastic change in education during the COVID-19 pandemic, however. As large and small group gatherings were discouraged and/or forbidden, as businesses shut their doors, and as cities quarantined, universities and colleges followed suit. Classes were canceled. Dorms evacuated. Students returned home to live with their families and resume coursework in an online world.

Many students in off-campus housing faced a particularly tough challenge. Without access to university services and with the loss of both off- and on-campus jobs, many of them returned home. Others worked out plans to quarantine with a friend. Either way, apartments—with leases ending at the end of the spring term or in August—became nothing more than storage units away from home.

Financial consequences and an uncertain fall semester

The result has been a significant financial challenge for both students and landlords. Many owners and property managers worked with renters to waive late fees and pointed them toward assistance resources. However, many students still have to pay rent on what is essentially a vacant property. And at the moment, the fall 2020 semester will most likely not provide answers that will satisfy all parties.

By April, many students were already making housing arrangements. Leases set to begin in September 2020 have already been signed and deposits made—but as the summer months progress, there remains a giant question mark about what else COVID-19 will deliver, especially as states and cities begin the delicate task of re-opening.

The re-opening process, as of this writing, is still new. With anti-mask and anti-social distancing protests growing, it has yet to be seen if these movements or the phased re-openings will result in a second wave of infections before the start of the fall term.

Universities, reeling financially from the on-campus housing refunds of the spring semester, will have to weigh re-opening with remote instruction. Efforts to start classes will require a redesign of the college experience. Some of these changes and issues will likely include:

  • Limiting enrollment in courses and lecture-hall seminars.

  • Implementing single-occupancy dorm life.

  • Canceling overseas study programs.

  • Grappling with a loss of international students reluctant to attend college in a nation with more COVID-19 cases and deaths than any other country.

For owners of off-campus housing, this uncertainty can roll either way. If colleges remain closed and resume online courses, the need for off-campus housing will again be at a minimum. Broken leases, cancellations, and sublets are sure to follow. But if classes resume, the combination of single-dorm occupancy and U.S. students now unable to study abroad may help spur demand for off-campus living arrangements.

The prospects for investors interested in the off-campus housing market

While no one really knows which way the COVID-19 wind will blow, each university is making its own decisions on approaching the fall 2020 semester. As long as there are students, there will be some need for off-campus housing—either for this term or in academic years to come. And there are a few key issues for investors to keep in mind:

  • Many students are first-time renters, which means they may not have the references and credit histories often required before leasing. Similarly, college students may not have a basic understanding of proper rental management, and they have a reputation for placing a lot of wear and tear on a property. In other words, this can add up to a more challenging property management experience.

  • It’s not uncommon for parents to co-sign leases, and the impact of this can have benefits and drawbacks. Some parents may be absent while others micromanage, and many offer the financial stability that ensures compliance with the terms of the lease. No matter the case, a landlord can expect to be dealing with multiple parties for a single unit.

  • COVID-19 has highlighted the need for greater maintenance of common areas, such as pools, fitness centers, lobbies, and mailboxes.

  • This is an opportunity for landlords to review leases. Under the present health crisis, it may be wise to consider a no-party clause (or to limit the number of guests) in light of social distancing guidelines and to protect the lessee and other tenants, as well as the overall condition of the property.

Morris Southeast Group is in this with you

Like many of you, Morris Southeast Group is looking forward to the day when COVID-19 will be history. Until that happens, we must adapt to conduct business in this new normal. And our team is here for you. To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Outlooks in the time of the inverted yield curve

For a few years now, there have been whispers of an impending recession. For all of that talk, though, it has always seemed to be coming but never quite happening. With the arrival of coronavirus onto the world stage, a recession (and potentially worse) is inevitable. Economists are closely looking at global indicators, and investors and non-investors alike are in an economically fearful state of mind.

One factor used to gain a better picture of both the global and domestic economies is bond market performance. And now is a good time to review what the experts have been seeing.

Bond market vs. stock market

While stock market performance gets all of the headlines, it’s the bond market—quietly performing in the background—that economists also study to gauge the economy. Although bonds and stocks tend to compete with one another for investment dollars, bonds traditionally do not have the levels of volatility and speculation associated with stocks.

As a result, bonds—a tool for the government or corporations to sell off debt—are often considered a better gauge of understanding the mindset of many investors. The bond market can sometimes provide a good picture of the economy 6 to 12 months from now.

Taking a closer look at yield curves before the crisis grew

One of the first indicators experts consider is the yield curve in the bond market. Generally speaking, the curve is based on the yields of various bonds with various term structures and maturity terms. The most commonly watched yield curve is between the two-year and 10-year bonds. Traditionally, short-term bonds have lower yields than long-term bonds because investors require more compensation for having their money tied up for a long period.

Yield rates are determined by the Federal Reserve, investor demand, and the banking industry. A change in rates changes the curve. Essentially, there are four types of curves:

  • Normal: This model has low yields for short-term bonds that increase and ultimately level off for bonds with a longer maturity. A normal curve is indicative of a stable economy.

  • Steep: Although similar to a normal curve, the steep model has higher yield rates along the curve with longer-term bond yields soaring upward. This indicates a growing economy.

  • Flat: As the name says, this curve is barely a curve at all. It’s basically a flat line and indicates uncertain economic times.

  • Inverted: The inverted model is the complete opposite of the normal yield curve. Here, short-term bonds have higher yields than long-term bonds, resulting in a downward-sloping curve. This is usually a warning that investors do not want their money tied up for extended periods for fear of an impending recession.

CRE in the time of an inverted curve cycle

While most economists agree that inverted curves are rare, the world economy had been drifting in and out of an inverted cycle for months before the current crisis, especially in European and Asian markets. The pre-coronavirus strength of the US economy in other sectors—such as consumer confidence, job growth, low interest rates, and yields slightly above those in other countries—seemed to be compensating for the inverted curve and holding off a recession.

This outlook started to change in February of this year when coronavirus fears swept around the globe. By March, in an effort to provide support for the economy, the Federal Reserve, in a coordinated effort with the Bank of England and the Bank of Japan, slashed its key interest rate to just above zero. Stocks tumbled, and the yield curve for 10-year bonds fell below that of two-year bonds. Simply stated, the steeper the inverted yield curve, the louder the recession alarm.

CRE and the implications of coronavirus

In a “normal” situation, some experts believe an inverted curve cycle can be good for CRE. To protect the yields gained in short-term bonds, investors turn toward the strength of commercial real estate. Similarly, investors looking for the higher yields once promised in long-term bonds also look to CRE, specifically in the industrial and multi-family sectors.

These days, as you are well aware, are far from ordinary. While lower interest rates are designed to encourage borrowing, this recent cut happened at a time when businesses have been forced to shut their doors, and workers are quarantined to their homes. Additionally, this is entirely new territory, and there is really no way to predict how long the impact of coronavirus will last—nor how deeply it will cut.

Supply lines, like those needed for remodels and new construction, may be disrupted. At the same time, some economists believe the Fed acted too swiftly, limiting a key policy tool usually reserved for counterbalancing an actual recession.

Even the best predictions are fluid

Experts are presently looking at three recovery scenarios: V-shaped, U-shaped, and W-shaped. In the first case (V), there is a rapid return to normalcy, with eased travel restrictions, the discovery of a vaccine, and growing confidence to re-open schools and businesses. On the other hand, a U-shaped recovery is slower, with coronavirus holding the steering wheel for the global economy. And W-shaped is a worse scenario, with a recovery hit hard again by further outbreaks and negative economic impacts.

As virus data is collected and analyzed—and indicators show the economy potentially moving into one of these scenarios—banks will respond accordingly.

The only accurate predictions that can be made, right now, is that the emphasis will remain on the essential health and welfare of billions of people—and that COVID-19 will continue to take a drastic toll on the global economy.

As always, Morris Southeast Group is committed to meeting your CRE needs. More importantly, we want all of you to stay healthy, heed medical advice, and take necessary precautions for you, your families, and your businesses.

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

No matter who wins, COVID-19 will be in the Oval Office

Since its earliest days, the cornerstone of Donald Trump’s presidency and his administration’s argument for re-election has been the strength of the economy. Talk of an inverted yield curve and a potential recession was often negated by the power of other economic indicators, such as low unemployment numbers. This strength was not only great on the home front but it also economically emboldened the U.S. internationally, especially when compared with European nations.

This fact wasn’t lost on many of the CRE industry’s top players. In two Q1 reports from early 2020 (the National Investor Sentiment Report and the Real Estate Roundtable’s 2020 Q1 Economic Sentiment Index), executives, lenders, investors, and brokers remained optimistic for 2020.

Even with a Presidential election on the horizon, both reports indicated a pre-election surge in investments to make money work, followed by a wait-and-see approach for the post-election cycle. It was all nothing out of the ordinary, given the data available.

COVID-19, 2020, and the election

Then, COVID-19 arrived and turned these predictions and expectations upside down. While it’s a maxim that investors are afraid of the unknown—a big reason for the wait-and-see approach—the virus has single-handedly presented this country, its economy, and its politics a big, heaping bowl of unknown and instability. The longer it lingers, the more likely it is that COVID-19 will be a presence during and after the campaign. And, no matter who wins, the virus is sure to be front-and-center in the Oval Office.

For the United States, the numbers, as of this writing, are not good. The country leads the world in cases (more than a million) and deaths (topping American casualties suffered in the Vietnam War). At the same time, economic stimulus packages expanded the national debt to new heights, tens of millions of Americans filed for unemployment benefits, and countless small businesses were left in loopholes as funds in the Paycheck Protection Program were swallowed up by large corporations.

As the stock market lost the gains made in recent years, debates raged about how and when states should re-open for business while combatting fears of lack of virus data and predictions of a second wave of infection.

Overseeing all of this is a White House that has swung from mentions of “total authority” to “no responsibility.” According to a recent NBC News/Commonwealth Fund poll, 53% of respondents had little or no trust in Trump providing information about the pandemic—though a significant minority of respondents do (at least, “somewhat”). COVID-19, it seems, is running the show on its own terms.

Recession is the only certainty

About the only thing that is certain in these uncertain times is that the long-predicted recession is rapidly approaching and will most likely remain for some time. A “normal” recession is often described as an economic correction—two consecutive quarters of economic contraction that follow a period of growth. As companies face financial struggles, lay-offs follow, and new jobs are not created. This then trickles over to consumers who choose to save money and spend less.

The COVID-19 recession, though, is different—primarily because it occurred suddenly and rapidly on a global scale. Despite efforts by the Fed to lower interest rates, the enormity of the crisis was apparent by the end of Q1. Q2 is already stacking up to be another economic train wreck—and that would signal the official start of the COVID-19 recession.

Predicting the path of the recession is anyone’s guess since this is unlike anything most Americans have ever witnessed. Managing the downturn will depend significantly on managing the quarantine. A strong effort in the latter aspect can mean a quicker end to the first; any missteps, though, could mean a more prolonged recession (or worse).

Election 2020

The 2020 race may be the year when many of us say, “Once upon a time, our only concerns about a Presidential election were cultural and social issues, foreign policy, tax codes, trade policies, and cap rates.” COVID-19 has forced Americans to look at the race through personal and national health lenses, rather than strictly a political one. Expect all candidates to present plans to not only manage the virus but also to rebuild the economy and attempt to address the personal situations of constituents.

As of yet, it’s too early to tell what those plans will be—or even how a recovery will look. Some models indicate a V-shaped recovery, while others look like a U, W, and an L. These last three all involve serious economic scars and a lingering malaise. No matter the model, though, the key for investors is always to be proactive, prepared, and agile. At Morris Southeast Group, we are holding firm to the belief that we will emerge from this crisis stronger, and that we must rely on each other to achieve this goal. To that end, we are here for you. To learn more about what Morris Southeast Group can do for you, now and in the months leading up to the election, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Super-low, zero, negative … and COVID-19

When we talk about life, there is a very good chance that there will be a bright line differentiating how things were and how things are: pre-COVID-19 and post-COVID-19. That line represents the moment when our everyday actions—from grocery shopping to socializing to leasing office space—changed.

The same may hold true for the Federal Reserve. Formulas and data that worked a year ago, or even during the Great Recession, haven’t had a chance to take hold because the economy remains in the grip of COVID-19. While government officials and scientists debate the timeline for re-opening the economy, millions of Americans and investors are waiting and wondering about what happens next—and short- and long-term answers still seem up in the air.

What a difference a few months can make

It wasn’t all that long ago—December 2019, to be exact—when the Federal Reserve, bolstered by a low unemployment rate, an expanding economy, and a healthy and appropriate inflation rate, said that interest rates would remain steady throughout 2020. Then, COVID-19 happened.

On January 21, 2020, the CDC confirmed the first case of COVID-19 on U.S. soil. By March 3, the Fed announced its first action, slashing interest rates to help protect an economy already slowing down as a result of the spreading crisis—a dramatic increase in new diagnoses, a growing death toll, and rampant unemployment as preventative lockdown and quarantine measures escalated.

Twelve days later, with an economy slowing to a snail’s pace, the Fed announced an additional cut, bringing interest rates to near-zero—edging the Fed closer to exhausting its ammunition to stimulate the economy during a recession.

Are super-low interest rates a good thing?

Before COVID-19, many economists debated the Fed’s use of super-low interest rates to keep the economic expansion on track in 2019. Essentially, by making money more affordable to borrow, it acts as an incentive for people to get money out of bank accounts and into the economy.

Nevertheless, critics worried that the low interest rates could create a false sense of investment security by encouraging borrowers to take dangerous risks, creating asset bubbles that could eventually burst, and supporting zombie companies that are actually slowing growth. In other words, some argue that the Feds’ best preventative-efforts may have merely been delaying an inevitable recession.

While the Fed’s response to COVID-19 is also meant to ease the economic pain, it’s largely unable to achieve the result—getting money out of savings accounts and into the economy—because, at the moment, there isn’t much of an economy. As a result, consumers are holding onto their cash for as long as possible as they look at mounting debt and a questionable timeline on when the country may re-open for business.

In all likelihood, it will be a rolling timeline as regions experience different peak times and transmission rates. All phased re-openings will depend on the course of COVID-19, not just the decisions of policymakers.

What happens with zero or negative interest rates?

When the Fed announced its steady interest rate course in December 2019, central banks in Europe and Japan were already trying zero and even negative interest rates. At the time, that meant investors were looking at the United States as a strong option for their own money. COVID-19, however, changed the investment game, leaving many to wonder if the U.S. will follow its global counterparts. While the Fed has given no indication it will take that path yet, it’s not a bad idea to understand how it would look.

Generally speaking, we all know the banking equation. The higher the interest rate, the more you pay to borrow money—from home loans to business loans to car loans. At the same time, that rate also determines how much money consumers earn on savings accounts.

If—if—the Fed should initiate a zero or negative interest rate course, banks would see their profit margins pinched. While they would undoubtedly respond with higher fees, many analysts project that savers and those on fixed incomes would have an increasingly difficult time making ends meet because they won’t be able to get a return on their money. The lower the interest rate dips below zero, the more far-reaching the implications on bond and Treasury yields and the stock market, as well as potential runs on banks and mutual funds.

The bottom line for investors

Since COVID-19 arrived in the US, Morris Southeast Group has stressed three key points. The first is that we are all in this together. It may seem like a cliché by now, but it’s true. Many of our fortunes—economic and health-related—rise and fall together. And where commercial real estate is concerned, tenants and owners must work together to weather the crisis.

The second is that the pandemic is a very fluid situation. In many ways, it’s forcing responses and procedures to strike a balance between sensible policies and humanitarian needs. No one knows exactly what steps the Fed will take next, but it’s clear that it is doing everything in its power to prevent the U.S. from entering negative interest rate territory.

This brings us to our third key point, and that is to be proactive. To that end, investors should create a contingency plan for their investments and money should the U.S. economy enter into zero to negative interest rates—and carefully pay attention to market and economic policies. To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.