OUR THOUGHTS ON THE CORONAVIRUS
These certainly are unique times that we’re all currently living in. It is undoubtable that fear and uncertainty are driving a lot of decisions today, as we all try to make sense of what is happening now and what may happen down the line. It is important to realize that we still have control of our decision making in some areas. In that spirit, we are writing to you to provide our outlook based on the various discussions we’re having with owners, investors, lenders, escrow officers, and property managers, combined with our combined 51-years of senior-level experience in the commercial real estate industry. These are nothing more than our opinions. Nothing too deep, but a good starting point for some thought and reflection. We will cover:
How long the current state is likely to last
The broad and narrow impact on the economy
The impact on labor across various key industries
The potential effects of the eviction/rent moratorium
The timeframe of this COVID-19 self-distancing and international time-out campaign is still uncertain, but we know it will be at least until the end of March, with a potential for a more mitigated solution lasting as long as 18-months into late-2021. What we also know is how markets behaved in previous times of extreme uncertainty coupled with a volatile second element – in this case COVID-19, in previous cases the Financial Crisis of 2007 and the Dotcom Bubble in 2001. In both instances, there was a delay in price adjustments of properties as deals continued to go through until list and close values started to shift downwards quickly, taking six to nine months to reach bottom. The climb back up from the bottom were different in each case, with the Dotcom Bubble leading directly into a bull market that lasted five strong years, and the more-protracted Financial Crisis recovery lasted over 11 years, with continued strength and resurgences throughout. We don’t have direct data for more distant timeframes, but what is true is that the real estate markets have always continued a strong climb throughout the last century, undoubtedly one of the strongest investment vehicles available.
The key factors of most concern to us, in the short-, medium-, and long-term are jobs and industry, as they are the drivers of growth and housing. In the short-term we are witnessing the potential end of many large and small businesses, with layoffs already occurring across a wide range of industries. Locally, hotels of all sizes and classes are actively laying off significant portions of their workforce. The Beverly Hilton just laid off two-thirds of its entire workforce. Marriott Hotels and Hilton Hotels have shuttered lodging nationwide for a period of at least one month. Restaurants across Los Angeles have been forced shut to seated dining and workforce across all levels has been laid off. Retailers and entire malls have closed, with sales, management, delivery, and more jobs on hiatus.
Even more directly, property owners are trying to make sense of the various competing eviction moratoriums being proposed. Los Angeles Mayor Garcetti’s plan provides for a renter of any type, commercial or residential, a non-payment timeframe from March 4 – May 31, 2020 for anyone adversely impacted by the COVID-19 situation, a description that covers just about the entire population and most businesses, with re-payment timeframes of three months for commercial tenants and six months for residential. A competing plan is being floated by the City Council that would cover absolutely every residential and commercial tenant and provide for a blanket 12-month re-payment period. There has not been any mention, though, of the impact this will have on landlords and lenders as payments are missed because of lack of rental income and potential occupancy issues.
How does all of this play out over the next couple years?
Well, if the shutdowns are shorter term, on the order of four to five months, massive government infusions of capital and cooperative restructuring of debt through a private public partnership, businesses may come back to life quickly, bolstered by low interest rates and relaxed lending, with job losses minimized. However, if the overall pandemic lifestyle is to last approximately 12-18 months, as a government study suggests, we’re looking at the possibility of mass layoffs today becoming permanent across many sectors of the economy, with workers either being replaced by either automation of more efficient operations as the economic engine shifts forward once again. Will this be a V-shaped or flatter recovery? Signs point to the latter, but we’ll need more information.
Even with all these unknowns, deals are happening and moving forward. Properties continue to come to market and buyers are moving forward, often in aggressive fashion, to close deals. A property at 435 N. Serrano came to market early last week at $5.7 million. Within days the Seller had received 10 competing offers. Following a group property tour (of just 2 units) the Sellers obtained multiple offers and selected one at $6.0 million – 5% above list price, non-contingent, and included a non-refundable released deposit of $400,000. I have similar stories of deals in El Sereno and other parts of Los Angeles. If you’re on the fence about a specific property, or have questions about your entire portfolio, we can look and give you our opinion.
Best Regards,
Iconic Investments Team
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