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Rent Control in Florida? Exploring the Issue

Rent Control in Florida? Exploring the Issue on morrissegroup.com

Rent control is one mechanism proposed to address affordable housing issues. Here are some pros, cons, and compromises

Long before COVID-19, countries around the world were facing a common crisis: affordable housing. Especially hard-hit were global cities in which developers were keenly interested, and rents were outpacing wages for low- and middle-income renters. The solution for many housing advocates and politicians was a new round of rent-control legislation.

For some, the idea of rent control is a dirty phrase, while for others, it’s a call to action. From London to Berlin, Barcelona to New York, politicians were lobbied, policies debated, and new laws and regulations enacted. By early 2019, the movement reached Florida, where several state legislators introduced rent control measures. Although HB 6053 died in May of that year, rent control is a topic that’s not expected to go away.

South Florida is a unique situation

Different regions around the world have their own set of circumstances for a housing crisis, and South Florida is somewhat unique. A joint effort by RCLCO Real Estate Advisors and the Urban Land Institute’s Terwilliger Center for Housing found that US construction favored larger, more expensive homes and multifamily projects over middle-class housing for more than a decade. The result was a lack of anything affordable for families earning between 80–120 percent of the region’s median income.

Exacerbating the problem in Florida—with its status as a sun-drenched vacation mecca—were projects that specifically catered to wealthy foreign and out-of-state buyers. Locals, in many instances, were left out in the cold. And the problem has only gotten worse as rents in the region have skyrocketed.

The double-edged sword of rent control

In any discussion of runaway rents and affordable housing, it’s understandable that some sort of rent control would be a proposed solution. After all, it’s not a new idea.

Some historians believe Julius Caesar enacted the first such law, while in the US, the idea was used to address the impact of a housing shortage between the two world wars. Recent efforts have included five-year rent freezes, enforced rent reduction, reducing the amount that landlords can raise rents within and between tenancies, and “just cause” eviction provisions.  

Then, there is the flip side. Critics are adamant that rent control does not live up to its intentions. The major complaint is that it discourages developers from building while encouraging some landlords to neglect properties or flip them into condos. The inevitable result is a reduction in the supply of leasable properties and higher prices. In other words, the rent-control solution is viewed as a short-term fix for an immediate symptom, rather than a long-term plan to address the underlying issues.

Florida is landlord-friendly

Thanks to state statute 125.0103, which makes it impossible for any county, municipality, or government entity to impose price controls upon a lawful business that is not a government agency, rent control in Florida essentially doesn’t exist. When coupled with rent-control legislation in other states, the Sunshine State looks very attractive to developers.

This is good news for developers, owners, and landlords, but the fact remains that some tenants can’t afford to lease property. Consequently, some municipalities have adapted by offering incentives to developers—and all parties agree that more can be provided. For inspiration, they’ve looked to other locales:

  • Orlando and Pinellas County, FL, offer an expedited permit process for projects that contain all or partial affordable units.

  • Fort Myers, FL, offers a Tax Increment Financing program to provide tax deferrals as an incentive to develop blighted neighborhoods.

  • King County, WA, stipulates that any extra county-owned lands suitable for residential development be earmarked for affordable housing. Landholdings are reviewed annually.

  • Montgomery County, MD, requires that any capital improvement project that included public facilities (library, train station, etc.) also be revaluated for adding affordable housing units.

  • In 2017, Vancouver, Canada, initiated an Empty Homes Tax, sometimes known as a vacancy tax. The tax was designed to address a rental shortage with a sizeable number of vacant homes by encouraging owners to rent out their vacant properties.

  • In 2019, Oregon became the first state in the nation to enact a statewide rent-control initiative—and it was accomplished through compromise. While rent increases were capped, the limit was set at 7 percent—above the 2 or 3 percent that many proponents advocated.

Could a compromise be the answer?

While each side debates the pros and cons of rent control, it’s fair to say there is no one-size-fits-all solution. What works for one city may not for another. There should, though, be an exploration of ideas that could work for all parties here in South Florida—and ensure that affordable housing exists for our residents. 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.

The Prospects For CRE In a COVID-19 World

The Prospects For CRE In a COVID-19 World on morrissegroup.com

How will recovery look, and when will it happen?

It’s interesting to look back at the early predictions on how COVID-19 would impact the CRE industry. Many analysts, either hopeful or looking at something unprecedented, only offered confident short-term calculations. Long-term projections typically referred to a domino effect, but the answer to questions about “how deep and how long?” have been “We don’t really know.”

The nation, however, is now on the other side of the short-term impact—at least, the first one. In addition to a loss of life only seen during certain wars and previous pandemics, the virus has marched through the US economy, pillaging most sectors. With record unemployment, trillions of dollars in stimulus money, numerous lost businesses, and a recession, how will CRE rise out of the settling dust?

The state of the economy

As of this writing, the May unemployment rate provided a glimmer of light at the end of the COVID-19 tunnel. With states reopening for business, 2.5 million jobs were added in May, and many officials seized this opportunity to celebrate some good news. The highest gains were seen in the restaurant/bar/food service industries, with hospitality coming in second place, construction in third, and healthcare in fourth.

Economists, on the other hand, are urging everyone to proceed with caution. With estimates ranging from 13.3% to several points higher (depending on how the number is calculated), the unemployment figure doesn’t yet indicate economic recovery. Most new jobs were for part-time positions, an indication of the fragility of the American economy. And with 30 million Americans still out of work, the unemployment rate remains the highest since the late 1940s.

CRE recovery will be an uphill battle

Recovery, regardless if it’s V-shaped or U-shaped, will take some time, particularly for CRE. Nearly half of commercial rents were not paid in April and May. Many tenants—including national chains—have indicated they will not be able to pay rent for months to come. If large retailers are saying this, then the situation for smaller businesses is even worse.

This adds up to a chain reaction: landlords may be forced to file bankruptcy, CRE prices may drop, banks and private investors may hold back on funding for commercial projects, and local governments may see unpaid property taxes.

Many experts forecast the economy to stabilize in the third quarter and start to recover in the fourth, but CBRE projects CRE to fully bounce back 12 to 30 months later, depending on the sector:

  • Office space is a bit of a mixed bag. Although leasing has slowed, vacancies are on the rise, and tenants and landlords are re-negotiating lease terms, a decrease in new office construction has helped slow falling rents.

  • Hotels were one of the first sectors to fall under COVID-19 containment efforts. Along with retail and food and beverage services, hotels are expected to take the longest to bounce back, especially those located in cities with a strong tourism and convention industry.

  • The retail sector, like hotels, was significantly impacted by quarantines and lockdowns. Many brick-and-mortar retailers felt the financial pinch as unemployed Americans focused their spending on essential items. Overall retail recovery hinges on Americans getting back to work, handling COVID-related debt, and having enough disposable income to begin shopping again.

  • Industrial properties are expected to bounce back the quickest, in large part due to the rapid growth of e-commerce and the need for localized logistics locations.

Some good news on the CRE front

Despite the caution on unemployment numbers and the prediction of a slower CRE recovery, investors interested in playing the long game that is commercial real estate investment are in a very interesting position. Incredibly low interest rates and discounted property prices give investors an opportunity to expand real estate holdings. Particularly attractive are properties owned by smaller landlords who are less equipped to deal with a COVID-19-controlled economy.

Similarly, foreign investors, especially those from Latin America, are looking to the long-term strength of the US market as a means of surviving the pandemic’s economic fallout in their own countries. With an eye toward shopping centers and mixed-use properties, Latin American investors—some more accustomed to economic uncertainty at home—see promise and stability in US income-producing assets.

Hope in South Florida

Each day, especially as cities and counties have reopened, we have all heard the phrase “new normal.” And while there are some confident predictions to make, how that situation will look remains fluid. With any economic and CRE recovery discussion, it’s important to remember that other issues can quickly have an impact: consumer anxiety, civil unrest, and a second wave of the pandemic, to name just a few.

Morris Southeast Group is keeping a close eye on all of these factors, and we will continue to revise our outlook and provide information as events unfold. If you have questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

The Marriage Between CRE & Infrastructure

The Marriage Between CRE & Infrastructure on morrissegroup.com

A rocky road means a rocky relationship

It’s time to take a break from COVID-19—somewhat of a break, that is. When the lockdowns started in March, area roadways were mostly absent of traffic. This presented an opportunity to speed up several major infrastructure upgrades in the Miami area, including interstates 395 and 195, as well as the Dolphin Expressway. The lack of traffic translated into a lack of inconvenience for commuters during these projects, and the result is hoped to be an early finish.

At the same time, the virus took the spotlight off of Ft. Lauderdale’s own infrastructure issues—last year’s series of water main and sewage line breaks, including one that was the largest in South Florida history. The city became a good example of the overall issues that the U.S. has with old infrastructure.

Why infrastructure is important to CRE

In the simplest terms, infrastructure is all of those systems and structures that allow a country to function. From communication systems to the power grids, roadways to railways, and water delivery to sewage removal, all of these items allow people to live, work, play, and move. They are also instrumental in growing the economy and allowing it to function.

To that end, maintenance, improvements, and expansion of infrastructure are key ingredients to the success and strength of commercial real estate. The more reliable or efficient these systems are, the more competitive a specific area can be—and that adds up to a stronger economy, higher property values and rents, and an increase in occupancy. For example, one study indicates that rents for office space located near public transportation are nearly 80% higher than those farther away.

When infrastructure fails, CRE feels it

Every four years, the American Society of Civil Engineers (ASCE) publishes its Infrastructure Report Card. In its most recent 2017 report, the U.S. received a D+ (poor). Issues on the national level include a $90 billion backlog of transit maintenance, 6.9 billion hours lost in traffic, an abundance of power outages, and failing wastewater treatment plants. At best estimate, the country is 30 years behind many of its global counterparts.

Florida fared better but not much, receiving a C (mediocre). Of greatest concern, according to the report, is the state’s drinking water, roads, public transit, energy, wastewater management, stormwater impacts, and coastal vulnerability. And all of this is strained by a population that increases by one million people each year.

Whether it’s on the national or local level, the bottom line is that failing or poor infrastructure hurts CRE. According to JLL, these issues have a tremendously detrimental impact on business operating costs, construction and production delays, and job growth and business expansion. Therefore, they hurt the demand for commercial properties. 

The infrastructure solution

As with many things in life, it all comes down to money. And necessary infrastructure improvements—typically financed through public-private partnerships—would require the United States to invest more than $2 trillion over the next 25 years on repairs and upgrades. According to the ASCE, funding sources could come from infrastructure trust funds, raising the motor fuel tax for the Highway Trust Fund, and implementing rates and fees to maintain and upgrade various infrastructure systems.

This, however, is 2020. And all roads, crumbling and otherwise, lead to COVID-19. A year ago, the sum of $2 trillion over 25 years was an unheard-of amount of money. But now, the government has spent well over that amount in just a matter of months to offset the economic crisis.

But is there a silver lining to the pandemic?

Can post-COVID-19 realities drive infrastructure improvements?

According to the World Economic Forum, the pandemic’s economic fallout may be just what American infrastructure needs—an opportunity to initiate a “New Deal” for the Age of COVID. Despite the Federal Reserve having exhausted its options to combat the recession, fiscal policies, innovative projects, and federal action regarding infrastructure could help right the economy. Among the suggestions are:

  • To create an infrastructure agency at the federal level to centralize some of the decision-making, develop a long-term and cohesive vision, and to improve accountability.

  • To harness the power of data to prioritize projects and to make the process and results more efficient.

  • To better utilize innovation and the Fourth Industrial Revolution to improve and streamline construction technology.

Morris Southeast Group wants to build something better

Infrastructure is a funny thing. It’s always there, just under the surface, and no one ever really pays attention to it—unless something goes wrong. While our plates have been full for the past few months, we can’t afford to continue to ignore all of the facets—systems, services, and people—that make our communities function. And perhaps one of the lessons from COVID-19 is that we have to build something better.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.

What’s Happening With Off-Campus Student Housing During the Pandemic?

What’s Happening With Off-Campus Student Housing During the Pandemic? on morrissegroup.com

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.

Negative Yields, a Recession, and CRE Investing

Negative Yields, a Recession, and CRE Investing on 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.

Managing 2020’s Election Year Jitters

Managing 2020’s Election Year Jitters on 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.

How Low Can Interest Rates Go?

How Low Can Interest Rates Go?

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.

COVID-19’s War On Main Street: The Status of Small Businesses

COVID-19’s War On Main Street: The Status of Small Businesses on morrissegroup.com

The fight to keep small businesses alive

By now, we are all too familiar with the artists’ illustrations of the virus that causes COVID-19. A sphere with spikes, scientists say this family of viruses resemble a sun, and so they call them “coronaviruses.” A more appropriate description of this round, spiky appearance may be a naval mine. Because right now, this country—in all of its regions and sectors—is at war.

One segment being crushed by COVID-19 is small businesses, places that line the nation’s Main Streets and strip malls. It’s these local stores that help define a community. For their owners, they are the dependent children into which they’ve sunk their savings and financial futures. Right now, those children are very ill. And each business’s failure could mean financial ruin for the owners, their families, and their employees, in addition to impacting the communities they call home.

COVID-19’s impact on small businesses

To get a better idea of COVID-19’s effect on small businesses, Main Street America (MSA), an organization dedicated to revitalizing commercial districts, conducted an online survey of 5,850 small business owners from March 25 to April 6. Of these organizations, 91% have less than 20 employees. As in all things related to COVID-19, the numbers are staggering.

  • As a result of quarantining and supply chain interruptions, it’s estimated that 3.5 million small businesses are at risk of permanently closing in the next two months. If the crisis lingers, that number swells to 7.5 million.

  • At the time of the survey, 35.7 million small business employees were potentially facing unemployment. The most recent number, as of this writing, is that a staggering 22 million people have filed unemployment claims.

  • Not surprisingly, small business owners overwhelmingly said their primary need was financial assistance and penalty-free extensions on bills.

The government’s response

There was great fanfare when both houses of Congress and President Trump reached an agreement and signed off on the $2 trillion economic stimulus package. As part of the efforts to help smaller entities, the Small Business Administration (SBA) was put in the lead. But shortly after the stimulus’s rollout, the SBA was swamped with claims and had to adapt.

The hallmark of the act, and one that directly served small businesses, was the Paycheck Protection Program (PPP), a $350 billion fund enabling qualifying organizations to cover eight weeks of payroll expenses. As of April 19, the PPP had run out of money, and additional funding was locked in a political tug-of-war between Republicans and Democrats. A second wave of funding is likely to pass soon, however.

Money, relief, and the national debt

Before the onset of COVID-19, the national debt was already swelling. And the final bill for coronavirus relief will likely send that number to unprecedented levels that have serious consequences. That said, most economists seem to believe—as of right now—that the combination of the ability of financial markets to absorb this debt, consumer demand in a post-COVID-19 recession, and low interest rates place the US in a strong position to initiate relief efforts and get the economy back on track.

The more critical issues are long-term. COVID-19 debt will remain on government balance sheets for years and, possibly, decades to come—especially as the Baby Boomers continue to age, further changing the demographics of the country and stressing entitlements programs. Policy changes to deal with the debt could include raising the retirement age, increasing taxes, and heavy government spending cuts.

What small business owners can do

While the government continues to hash out the details of future stimulus packages, small business owners should be proactive and take steps now.

  • All levels of government are working on packages and programs to help local businesses survive. Check with local government entities and visit the SBA website. Once funds are made available, the SBA and banks will again process claims and applications. Become familiar with the loan forms and gather the required information so the application process can begin. Stick with the tedious process and attempt to get the money as soon as you can, given the possibility it will again run out—first come, first served.

  • Make a three-month financial plan. Speak to suppliers, landlords, and lenders to explore options for offsetting costs.

  • Develop a business plan for how to survive the changes in a post-COVID-19 world, with a nod toward how customers may behave, how services and/or products can be made available online, and how to market the business’s adaptations and offerings for regular and new customers.

What we can do

At the start of this post, we mentioned that it might be more appropriate to look at the illustration of the COVID-19 microbe as less of a sun and more of a naval mine–for good reason. The only way to consider the mind-boggling numbers—from infections to the number of unemployed to the stimulus dollars—is that this is a war. As in other wars, when national debts have historically skyrocketed, it will take time to recover.

At Morris Southeast Group, we are holding firm to the belief that we are all in this—and will get through it—together. And if history is any guide, the eventual aftermath of this shock event will see renewed success for our economy and small business owners.

We are here for you and the small businesses in our communities. We hope you join us in shopping these businesses if they are open during quarantine and as restrictions slowly ease.

If you have any commercial real estate concerns or questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Can You File a Business Interruption Insurance Claim to Survive COVID-19?

Can You File a Business Interruption Insurance Claim to Survive COVID-19? on morrissegroup.com

Does business interruption coverage provide protection during a pandemic?

As commercial property owners and their tenants continue to seek new ways of coping in a COVID-19-weary world, they are looking at ways to recoup some of the losses incurred as a result of preventative shutdown and isolation measures. One area getting a lot of attention is Business Interruption/Income Insurance (BI).

Designed as a means of covering physical damage or physical loss, BI is typically an add-on to commercial property insurance policies. While that certainly seems pretty black and white, there are gray areas—and COVID-19 is shining a spotlight on the gray. The question for policyholders, carriers, courts, and governments involves determining how and if a pandemic meets that standard.

Three critical areas of business interruption insurance

Generally speaking, there are three key areas when it comes to BI:

  • Business income coverage provides for sustained loss of income due to a suspension of operations by a covered cause that resulted in the physical loss or damage to the policyholder’s property.

  • Contingent business interruption coverage extends sustained-loss coverage to when the physical damage occurs at another property, such as at a customer or supplier. Any damage that impacts the income of the policyholder may be covered, as long the damage is listed as a covered cause in the holder’s policy.

  • Order of civil authority coverage provides for BI losses when a civil authority prohibits or impairs access to the policyholder’s property.

Policy language and COVID-19 coverage

It almost goes without saying that policyholders and insurers are currently at odds—or will be for years to come—as a result of COVID-19 and the terms of BI coverage. In the vast majority of cases, the resolution of any disputes is based on the wording in individual policies and previous court decisions.

  • The first prevailing concern is the idea of “covered cause.” Most BI policies are cause-specific, and many of the reasons leading to a claim are disaster-related, such as hurricanes, earthquakes, or fires. Crucially, as a result of the 2003 SARS outbreak, the insurance industry added an “Exclusion of Loss Due to Virus or Bacteria Endorsement” to most BI policies, which likely means the pandemic won’t be covered. In addition, courts have ruled in the past that contamination does not necessarily constitute “physical damage,” a term that is critical in filing a BI claim.

  • This same idea applies to contingent interruption coverage. Again, this is a loss incurred by the policyholder as a result of physical damage elsewhere, such as at a supplier. These claims can only be filed if the damage is listed among the specifics. And, depending on the policy—a virus is likely excluded and not a listed reason.

  • As property owners find the margin for filing a BI claim shrinking, many might look to submitting a claim under the civil authority clause, since this clause does not necessarily require physical damage. Again, looking at previous court decisions, claims filed here were typically rejected because it was determined these orders were issued to prevent future damage or—in the case of COVID-19—to protect the labor force. There is a case in Louisiana, however, in which a restaurant is claiming that the state’s COVID-19-related public gathering restrictions triggered the civil authority provision.

What a policyholder can do now

Despite the intricacies of policy language and what may be some lengthy legal battles over claim disputes, it’s imperative for policyholders to be proactive—because that’s what insurers are also doing.

  • Contact your insurer and request a complete copy of your insurance policy. Once in hand, look for the phrase “cause of loss to trigger coverage.” From here, check to see which coverages are included in the policy and the length of time of each. Look for the “Exclusion of Loss Due to Virus or Bacteria Endorsement” exclusion.
  • In addition to BI policies, it’s also important to review other insurances, such as general liability, pollution liability, workers’ compensation, and employment practices liability. It cannot be stressed enough that the current pandemic is uncharted territory, and it’s better to be prepared than to be surprised by anything that may or may not be covered.

Behind the scenes and out front

While this is sure to be a litigious process for some time and rates may certainly rise, there are also efforts happening behind the scenes to help ease the burden on policyholders and carriers. More than likely, the federal government will negotiate and pass additional stimulus packages while working with the insurance industry to create a solution to assist businesses. At the state level, bills have been introduced to address COVID-19 and BI coverage.

A legislator in Massachusetts, for example, introduced a bill that would “require insurance companies in the state to provide business interruption insurance to policy holders whose businesses have been negatively impacted by COVID-19.” Similar measures have been proposed in New Jersey and Ohio.

The insurance industry is fighting these efforts, however, for simple, fundamental reasons that go way beyond safeguarding their profit margins. Most policies have an exclusion for viruses; any legislation that alters the terms may violate the Contract Clause in Article I of the U.S. Constitution; and there simply won’t be enough money to pay out all such claims. Some form of federal assistance will be necessary, whether it flows through the insurance industry or not.

We know this is a lot digest, and we certainly understand how your anxiety may be shooting off in different directions. But as we’ve said from the start of this emergency, the team at Morris Southeast Group believes that commercial real estate investors and tenants will get through this crisis.

And we are here to answer any questions you may have. Call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

How Will Lenders Respond to COVID-19?

How Will Lenders Respond to COVID-19? on morrissegroup.com

Financial institutions face unprecedented measures in unprecedented times

April 1 was a key milestone on everyone’s mind—the first date that many payments would be due in a COVID-19-weary world on lockdown. In the weeks leading up to that date, the Federal government negotiated, passed, and signed a monumental $2 trillion relief package. Some CEOs, like Wayne Kent Taylor of Texas Roadhouse, announced that they would slash or surrender their salaries so employees could continue to be paid. Many banks began formulating new policies and programs, including payment deferrals and less-expensive lines of credit for small businesses and consumers.

Many stakeholders who could started pitching in, hoping to provide an economic bridge to weather this crisis. Then came reality, as the government signaled a continuation of the lockdown for 30 more days. May is now another critical milestone in fiscal responsibilities that may be missed.

What will the lending industry do as this crisis continues?

Where are we now?

When experts are asked to predict the economic impact of the coronavirus pandemic, they usually have a range of answers and scenarios. There is simply no way to predict anything accurately—other than there will most definitely be a huge financial fallout. One recent study, for example, ran more than 12,000 bank-held commercial loans through a worst-case-scenario algorithm. Factoring in a 35% plunge in CRE prices over the next two years, it predicts a dramatic increase in commercial defaults, up to 8% from 0.4%.

This study sees the hotel industry taking the most immediate hit, with a 35% cumulative default rate. This is followed by retail, with 16%. Office, multifamily, and industrial sectors would also see a loss but at a more measured pace.

Where are the lenders now?

The fear, of course, is that once borrowers begin missing payments, defaulting on loans, or permanently locking doors, the lending sector will be the next domino to fall.

If there can be any kind of silver lining in all of this, it’s that today’s crisis is not like 2008, when the financial sector was blamed for wrecking the economy while its recovery was made the responsibility of taxpayers. And it’s believed that banks will be able to weather short-term loan losses, although some lenders may become overwhelmed should the economic crisis linger.

Many analysts also think the current situation is an opportunity for the lending industry to step up—to prove that it is not abandoning communities, employees, or borrowers. Among the efforts already underway are donations to charitable organizations, “fee waivers; deferred payments for credit cards, auto loans and mortgages; loan modifications; low-rate and zero-rate loans and other accommodations.”

In addition, the initial $2 trillion stimulus package gave banks strategies to provide aid to businesses, including $350 billion in government-backed, low-cost or forgivable Small Business Administration (SBA) loans. This initial round of funding, however, has run out. As of this writing, the second wave of small-business-loan financing—about $370 billion—is set to be passed by Congress. Many analysts project that this money, too, will run out. And “first come, first served” is the order of the day for small businesses seeking these funds.

How lenders are preparing for tomorrow

Like many business and government sectors, simultaneous conversations are occurring to address the possible long-range implications and how best to prepare for them. Among the items up for discussion are executive pay cuts, suspending dividend payouts, and examining how long financial institutions can delay job cuts and changes to their business models. It is, without a doubt, a very delicate balancing act, and each effort will have its own share of consequences.

Naturally—and this can’t be stressed enough—it is simply too early to make any concrete predictions. While Congress is about to pass a fourth stimulus package—and more legislation may be on the way— it’s the progression of COVID-19 and the timing of a vaccine that will ultimately determine the longer-term response of the Federal Reserve, the stock market, and the lending industry.

How you can be proactive

Lenders have implemented steps to help consumers through the COVID-19 maze, including identifying at-risk borrowers and geographies, clarifying approval criteria and new procedures, and developing programs to assist those impacted by the pandemic. And consumers also have an opportunity to be proactive. They should reach out to their lenders to learn precisely what options are available while clearly communicating the financial impact of the pandemic and economic shutdown.

Commercial real estate property owners should collaborate with lenders and explore ways to provide relief to hard-hit tenants. Business owners with a mortgage may be able to seek some accommodations that salvage cash flow in the short term, as well. In most cases, lenders have a vested interest in hammering out arrangements that keep borrowers solvent—and to stop the potential fall of financial dominoes that could wreck the economy.

At Morris Southeast Group, we are holding firm to the belief that we are all in this together. To that end, we are here for you. If you have questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.


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