COVID-19 has done a number on the American economy, with unemployment rates reaching 14.4% in April. By November, that number had dropped to 6.7%, but we’re still seeing fallout because consumers now aren’t using certain businesses in the same way.
In Florida, a shift in consumer behavior is driving much of this downturn rather than government-mandated restrictions. For example, people aren’t traveling as frequently as in pre-pandemic days, leaving much of the state’s hospitality industry in a difficult position.
However, it isn’t all bad news, as some businesses are thriving in this economy. Here’s a look at how COVID affects various industries throughout the country and what it may mean for commercial real estate:
Perhaps no sector has experienced more significant COVID challenges than the hotel industry, which has seen occupancy and revenue decrease at record levels.
In Q2 2020, overall occupancy fell by over 60% from the previous year, despite the average daily rate (ADR) falling by over 37%. Rooms were cheaper, but people still weren’t renting them. The result: revenue per available room (RevPAR) is down by 75%.
The Royalton Hotel NYC, once considered one of the city’s most exclusive properties for the rich and famous, sold to investors for $41 million in September. This price tag is a 25% reduction from its selling price in 2017. People simply aren’t visiting hotels as much during the pandemic, and it’s causing issues for investors.
Another industry that’s struggling is retail, which saw total sales decrease by 8.1% in Q2 of 2020. This decline is the most significant since the recession of 2009.
However, it’s worth noting that some retailers are thriving in this economy, particularly e-commerce outlets and those that sell essential goods. It’s the smaller stores, certain big-box retailers, and shopping malls are struggling, although some of these spaces were being repurposed, even before COVID.
With the pandemic forcing employees to work from home, the office sector is experiencing some challenges keeping spaces occupied. The second quarter of 2020 saw leasing activity fall by 44% from the previous year, and the national office vacancy rate increased to 13%.
Demand for downtown office space is decreasing at a more rapid rate than suburban real estate. This trend suggests that offices will still have plenty of value in the future, even if space in prestigious high-rises remains in less demand.
Again, it isn’t all bad news—some industries are actually reaping rewards from the change in consumer behavior.
Amazon’s e-commerce successes are well-documented, with the company posting a record-level revenue increase of 37% during the second quarter of 2020.
This trend isn’t exclusive to Amazon or online retail, though another windfall is related to the fortunes of e-commerce. The industrial and warehouse sector is seeing a bump due to the shift away from brick-and-mortar stores. Warehouses and distribution sites are in high demand, and these properties are experiencing low vacancy rates and asking for record-high rents as a result.
Distributors are also relying less on China and other overseas entities because of the logistical issues with shipping goods right now. Keeping the supply chain moving involves ordering more products at once and storing them until needed, which is good news for industrial property owners.
Also, since we’re dealing with a global health emergency and have an aging population, it makes sense that there’s a greater need for laboratory space. The life sciences industry is exploding, with properties re-selling for as much as 22-times their previous values.
Strong tenant demand is driving this trend. And it could continue because of the need for facilities adhering to the Good Manufacturing Practice regulations for human pharmaceuticals. Labs that can meet these requirements have immense value, and many remain open 24 hours per day to keep up with demand throughout the pandemic.
Multifamily properties are going through the ups and downs of the current economy. Despite the harsh economic downturn in Q2, there wasn’t quite the expected rise in vacancies in apartment buildings and condos. The assumed reason: stimulus packages provided people with unemployment benefits aimed at keeping a roof over their heads.
An average month’s rent has dropped by 1.4% since Q1, and vacancy rates increased slightly. But it could have been much worse, given the high unemployment rates.
Urban areas and states with particularly high unemployment rates are being hit much harder than others, and there is a great demand for affordable housing all over the country.
Of course, the challenges caused by COVID-19 are driving many changes to the commercial real estate industry. People can’t interact at the same levels as this time last year, so there’s far less immediate need for spaces that encourage gathering or travel.
But there is some light at the end of the tunnel that could see us return to normalcy sooner rather than later. With the Pfizer and Moderna vaccines rolling out to the public and others potentially soon to follow, we might largely put this pandemic behind us by Q3 2021.
At that time, hotels and retailers could see their numbers start to rebound, and demand for all office space could return, as well. For CRE investors, the coming months are incredibly important because a potential recovery could drastically change the economic landscape again.
For more commercial real estate insights, property management services, or CRE investment guidance, reach out to Morris Southeast Group at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or via email at email@example.com.
We’re learning more every day about the novel coronavirus that’s wreaking havoc on our society, giving us additional insight on how to protect ourselves.
For example, it’s now common knowledge that the virus spreads person-to-person through close contact, but evidence also suggests that COVID-19 can remain airborne for hours in indoor spaces. It can even travel through HVAC systems. As a result, the longer people stay in an enclosed environment, the greater the potential transmission risk.
Indoor airborne transmission is causing problems in a variety of industries. Bars, restaurants, and retail establishments are riskier environments for staff and customers, while some office workers also feel unsafe returning to the job site.
The good news in South Florida is that we’re well-positioned to take advantage of the mild winter weather and can make better use of outdoor spaces than pretty much any other location in the country.
The restaurant industry is an excellent example of how to use outdoor space to keep a business open. The more fortunate restaurants have patios, and others are developing them, allowing patrons to stay outdoors while enjoying food and drinks.
One drawback is that patios can get crowded, with tables next to each other allowing for transmission to occur between diners.
We’re seeing some businesses create proactive solutions to this issue by expanding their outdoor dining spaces. While extending a patio often relies on cities making exceptions or changing their laws, municipalities worldwide are doing just that to encourage a safer environment for restaurant-goers.
Open-air shopping centers also allow for a safer experience for consumers with fewer restrictions on the number of people who can be in an area at one time. This additional flexibility assists businesses as they attempt to stay afloat during this difficult time.
New York City is taking the outdoor shopping experience to a new level by allowing retail shops to extend into outdoor spaces. As the holidays approach, as many as 40,000 small businesses could begin using nearby outdoor areas.
The weather in South Florida is clearly better than winter in New York, so it makes sense for businesses and commercial property owners to begin exploring the concept of open storefronts to allow shoppers to socially distance.
It isn’t just retail spaces that can use the outdoors to their advantage in South Florida, as offices can also shift certain meetings and tasks outside.
The easiest way to accomplish this is by using courtyards and nearby parks when face-to-face interaction is necessary. This trend isn’t new, either, as 79% of new construction in Manhattan since 2010 features outdoor space.
If your building has some outdoor space, like a usable rooftop or a place to build a terrace, property owners can consider renovating to create a brand-new amenity for tenants. Even though COVID-19 likely won’t last forever, the addition of outdoor space can attract renters well into the future.
Staying outdoors isn’t always feasible, as there are situations where the weather won’t cooperate or people have sensitive information that they aren’t comfortable discussing in a public setting. There’s also the fact that businesses are paying for these buildings, so they’ll want to use them.
That’s fair, and there are ways to make interior offices, stores, and restaurants safer for all who visit. Of course, cleaning and sanitizing help reduce the spread of the virus, but what about the air?
Encouraging employees and customers to maintain distance and using physical shields are part of the equation. However, as mentioned earlier, aerosols can linger in the air for hours and spread through HVAC systems.
One solution is to add ultraviolet lights to the interior of the building’s ductwork. In doing so, 99.9% of seasonal viruses will die before circulating through the building, keeping people safer from this type of transmission.
Morris Southeast Group is on top of the newest retail, dining, and office space trends, ensuring that you can make the necessary adjustments to thrive in the current business landscape. A little flexibility can go a long way, and maximizing outdoor space usage, can be a novel way to attract consumers and tenants while keeping them safer.
Call us at 954.474.1776 to learn how Morris Southeast Group can assist you. You can also reach out to Ken Morris directly at 954.240.4400 or firstname.lastname@example.org.
Before the COVID-19 pandemic, it was common for tenants in “Class A” buildings to ask for significant improvements to office space as a part of their real estate lease. In essence, this practice allows companies to obtain a highly-customized office as part of their agreement.
The owners of Class A office buildings would routinely agree with these demands because it was normal and customary in the market. And for longer-term leases, the costs would be underwritten by the rent paid by the tenant.
But things have changed. There are numerous and increasing office vacancies, and some companies are debating whether they will even need office space in the future. Many businesses now ask for more flexibility and shorter-term leases, putting a strain on property owners as they look to earn a return on investment and secure financing.
The result is that in many cases, it may no longer make financial sense for commercial property owners to pay for custom office renovations and property improvements upfront. There’s simply no guarantee the tenant will stick around long enough to make it worth their while, especially if the initial lease is short-term.
Here’s some information on this situation and insight into what we can expect moving forward.
Pre-pandemic, it was customary for commercial tenants to sign 10-, seven-, and five-year leases. These terms made it easier for property owners to secure loans. And office customization was palatable because there was plenty of time for amortizing the cost of the improvements and maintaining a steady ROI.
Today, however, businesses are looking to sign one- to three-year leases or one-year extensions on their current arrangements. They don’t want to make long-term commitments because they have no idea how their business will look in one year, let alone five.
This trend causes significant follow-on effects, as lenders don’t want to provide long-term loans without long-term leases backing them. Financial institutions typically agree to five to 10-year commercial real estate mortgages when they’re supported by a rent roll with an average term—but that often isn’t possible when tenants are angling for shorter periods.
The lack of long-term tenants also creates difficulty when valuing the office space because short-term leases are fundamentally less valuable to the owner in terms of refinancing or trading the asset. In turn, property owners may opt to charge more to make up for the lack of a long-term commitment—but the increased costs could scare many companies away.
And, fundamentally, owners are also now less likely to agree to property improvements or customized offices—the chances of recouping their investment shrink dramatically.
Let’s say a doctor is looking for some office space and signs a 10-year lease with a property owner. This physician needs the office arranged in a specific way to meet with patients, and the cost to retrofit the space is $50 per square foot.
When averaging these numbers over the 10-year lease, the office’s customization will cost the landlord $5 per square foot per year. Therefore, if the doctor pays $40 per square foot, the landlord nets about $35 (though, for simplicity’s sake, we aren’t counting expenses like mortgage interest and maintenance). Since there is a 10-year period to make money on this investment, the property owner could accept these terms and be confident about the customizations.
However, when you shorten the lease period from 10 years to three, it paints a very different picture for the property owner.
Instead of spreading the cost of improvements over a decade and paying $5 per year per square foot, the shorter lease guarantees the landlord only three years to pay for the renovations. Therefore, the office customization costs $16.67 per square foot per year, leaving the property owner with a profit of only $23.33 per square foot before mortgage and maintenance expenses.
It’s easy to see how the owner could end up losing money in that situation—especially if the tenant bails after three years and the renovated space doesn’t work for other potential tenants.
The result is that landlords will likely avoid offering buildouts and customization on shorter deals. If a business wants property improvements and a short-term lease, it will most likely have to pay for them.
The problems COVID-19 has caused commercial property investors to go beyond a hesitance to customize office space; these issues also influence how lenders approach loans.
Commercial real estate loans typically have seven to 10-year terms, after which a balloon payment for the remaining balance becomes due. These loans usually have amortization periods of about 20-25 years.
Many lenders hesitate to take this type of risk because commercial real estate is currently volatile, and tenants that back the property owner’s income stream choose shorter leases. There’s no telling if a lender will get their balloon payments at the end of the loan term or if stable tenants will back refinancing—so they’re more closely evaluating applications.
This, in turn, puts pressure on the investor to only offer lease terms that make sense and show a clear profit margin. And significant customizations are likely not part of the equation.
Here are a few critical observations about how all of this may play out:
We’re in a difficult period for businesses and investors, and the uncertainty is having a significant impact on the commercial real estate industry in many ways. For a read on some other vital issues, please check out our previous blogs:
If you’re struggling with the prospect of investing in or leasing commercial property during COVID-19, call Morris Southeast Group at 954.474.1776 for expert guidance. You can also contact Ken Morris directly by calling 954.240.4400 or via email at email@example.com.
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.
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.
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.
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:
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 firstname.lastname@example.org.
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?
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.
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:
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.
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 email@example.com.
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.
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.
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.
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?
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:
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 firstname.lastname@example.org.
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.
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.
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:
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.
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:
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 email@example.com.
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.
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.
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:
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.
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.
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 firstname.lastname@example.org.
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.
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.
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).
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 email@example.com.
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.
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.
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.
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.
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 firstname.lastname@example.org.