First, let’s be clear, even the top economist and experts don’t know what is going to happen. This is written as an opinion piece on what I see coming during and after the COVID-19 fallout. My opinion is based on what I have read and what I understand from economics research.
Right now, there is a lot of uncertainty. Uncertainty in the health of our families and loved ones and uncertainty in our jobs, businesses and the overall economy. This could still play out many different ways and we pray that it plays out in a way that hurts the least amount of people, both financially and economically.
Short term, the majority of Americans will be OK. Uncle Sam is taking care of most of America, especially the middle class. In fact, if you make under $60,000/year, you will make as much or more money if you get laid off – at least for the next 4 months.
Small businesses are going to get hit. Some will be ok, others will suffer due to no or low reserves. There is a lot of small business money coming down the pipeline that a large portion of business will be able to access. This will give most businesses enough of a life line to make it through 3-4 months. Many businesses, however, will chew completely through their reserves and go deeper in debt.
Some businesses will shut their doors and some business owners and investors will sell to the highest bidder.
This is where a lot of scenarios play out depending on many factors. How long do we remain shut down? Will we start back up, only to see a spike again and shut back down? How many lives are lost? Does the government continue to provide stimulus? How quickly do people go back to life as usual?
Here is what I am basing my opinion on. Starting in the middle of May, most of America begins to go back to work slowly. Hospitality, travel, large venues, bars and restaurants are still shut down, but starting in late May or early June restaurants, hotels, airlines, etc begin to open back up (with restrictions) in most of the country and by July the entire country is mostly open.
We may see some spikes, but hospitals are much more prepared this time around, so they can handle it. Plus, more isolation efforts will be in place, which will help us separate those infected much more quickly.
This doesn’t mean that everything is fine. The ripple effects of the shutdown and the uncertainty and fear of people make it difficult for many small businesses to stay in business. Restaurants, bars, breweries, Airbnb’s and other service-based businesses, as well as other businesses that had too much debt and not enough cash will be forced to shut their doors for good. This in turn keeps unemployment levels high and keeps the economy in a mild recession.
Money lending will be cheap, but banks will be nervous about lending. Getting a loan on an owner-occupied home will be the easiest. Credit requirements and debt to income will be less forgiving, but otherwise getting a refinance or new loan should be fairly easy if you have good credit and income to support the loan.
Commercial lending will be tight. The regional and nation banks go in hiding when things get messy. As real estate loses value (which I expect to happen), those banks hide and don’t come out until it’s hot and everyone is jumping in again (the worst time to lend in my opinion). Local banks and credit unions will be investors friends again. Fannie Mae and Freddie Mac will still be major players in multifamily, although their standards will be more stringent.
Commercial real estate will lose value no matter how bad this gets. Right now, lending requirements have changed across the board. Lenders that are still active are wanting larger down payments, higher interest and/or larger capital reserve accounts. This means more money/equity needs to come to the table, which in turn means that you need to pay less, in order to make the same returns. I would also expect investors to demand higher returns, due to the perceived risk and tighter underwriting standards.
The other thing that will affect pricing is the inventory of distressed sales. I don’t expect a major sell off in most commercial assets. Multifamily, Warehouse, Industrial, Self-Storage and office all should fare well. Some under-capitalized assets will end up needing to hit the market, which will cause some downward pressure, but I don’t expect there to be much more than a 10-20% discount from the peak in most markets.
Retail could be where the blood bath is. Many landlords are not getting paid, which in turn causes them to not be able to pay their mortgage, eventually causing the lender to force a sale or foreclose. Retail and office centers that have a high concentration of service-based businesses or regular mom and pop retail stores that are non-essential businesses, are going to be the hardest hit.
Restaurants, bars and breweries were already over-saturated. Then shutdowns hit across the nation forcing many to shut their doors. Some restaurants are making more money today, as they have adjusted well and hit on the curbside pick-up and delivery options. Many others, however, will most definitely not survive.
Where are the opportunities?
Opportunities will be very present as we come out of this. There will certainly be opportunity in the medical industry and servicing the industry. Technology, especially supporting a “stay at home” model, will be ripe to capture. Really anything that can serve the population in another pandemic will be profitable – at least in the short term.
Businesses. As I stated earlier, many businesses will go under, providing opportunity to purchase distressed businesses or the real estate they did business in. Right now, we are paying close attention to small to medium sized business in industries that we feel are growing. There could be some great opportunity coming down the pipeline with business that could not sustain through this time or businesses with owners looking to retire. Look for businesses that owned multi-tenant real estate in prime locations and you may have a gem.
Also, many business owners may be willing to do seller financing and even stay on in a management or sales type role for a while.
Retail centers are certainly going to be negatively impacted and there will be opportunity to acquire those assets at a discount. There will be many deals that appear to be good, but look for well-located real estate. Great locations, allow for multiple strategies, including redevelopment. Having a good mix of service based, grocery, restaurant and retail will be key.
Vacation rentals are certainly going to get hit hard over the next year or more. This will lead to many distressed sales, many of which will be bought up by people looking for a new home. In locations that have a high concentration of tourism, however, this will not be the case, leading to opportunity for investors.
Warehouse may not see much of a contraction in pricing, but certainly should benefit from the change in the economy. Businesses are finding that they didn’t have inventory to keep enough product. I feel we also have further pushed forward the retail “Armageddon.” Warehouse deals certainly won’t be purchased for pennies on the dollar like retail could, but if you can find or build at a good price, then warehouse should make for a great investment.
Single family housing and suburban multifamily will be great investments. I expect to see a shift in thinking from the city living in a high-rise with shared community areas, to having your own space, with a yard. Think about the renters in the urban core that are living in high rises, not able to go outside, not able to use the pool, community center, workout rooms, etc. They feel uncomfortable walking the hallway and taking the elevator. How nice would having a yard be right now? This change in thinking, along with low interest rates will create a boom in single family sales as well as increased occupancy in suburban multifamily.
This will also lead to well-priced urban core multifamily. Vacancies will be higher and rents will take a hit, but as time goes on, people will move back in and rents will increase.
Innovative technology that takes advantage of social distancing practices and makes virtual meetings and contact easier and more effective will play a valuable role. Investing in or creating tech that makes solves these needs and paradigm shifts is certain going to make people a lot of money.
Precious metals, real estate and oil will provide a great hedge against inflation. With all of the money that is being printed to save our economy, it is very possible that we will see a period of large inflation. If this happens, then cash is the worst position to be in.
With each down turn comes new opportunities. There are certainly opportunities that will present themselves as things shake out. We are going to be keeping our eyes and ears open. Studying market trends and listening to what consumers want will allow us to provide solutions to people as things stabilize.
One thing I do know for sure is that there is no crystal ball. Be open for opportunity, be willing to pivot and keep a positive attitude.
Well said, Todd. Nicely done.