One Big Thing
Still Flowing: CMBS originators and debt funds have pulled back during the pandemic. However, the real estate capital markets have largely continued to function, thus far avoiding the near-complete shutdown experienced during the Great Financial Crisis and preventing a major crash in valuations. Real Clear Analytics This brings to mind something that I wrote on March 13th on the old blog in a post titled Perspective before the shutdown had taken full effect Landmark Links:
We’ve seen more than a bit of anecdotal evidence that the fire hose of liquidity that has flooded the private debt space in recent years has provided ample cover for maturity defaults and cost overruns that have been present for the better part of this expansion. The willingness of lenders to extend bridge-to-bridge and construction-to-bridge financing to otherwise busted projects has masked a lot of issues that otherwise would have come to the surface much sooner. If/when that wave of liquidity dries up, things will change quickly and there is already some evidence that the ultimate sources of that capital are beginning to run into issues. Much of the real estate market has benefited from low supply which will provide some cushion, at least in terms of asset values should this liquidity tidal wave run dry. But rest assured, the inability to recap struggling projects is the immediate risk in the market right now.
The liquidity spigot is still largely flowing, which is why despite other sector performance issues, we have not yet seen a major decline in valuations for most commercial property types. There was a major hiccup in March when securitization markets and back-leverage largely seized up. Then the Fed stepped in and things started moving again.
The broader point here is that large price corrections are often dictated more by liquidity in the capital market than they are about actual property fundamentals. There were performance default issues in before the pandemic but they never led to price declines because there was plenty of liquidity to allow owners to refinance and live another day.
Going forward, sectors where capital remains liquid – apartments, warehouse, self storage – are unlikely to see much in the way of price declines. Assets where the capital markets are already (or becoming) illiquid – hotels, some retail, and ultimately office – will experience price declines.
What I’m Reading
Wait and See: Colliers’ mid-year office sector report was a rather bleak read with vacancy rising and net absorption falling. However, the real impact may not be felt until late 2020 or early 2021 when companies finally start calling a substantial part of their employees back to the office and actually assess their space needs. In the meantime, sublease availability continues to pile up in many markets. Colliers
Vultures Circling: Millions of American home owners are house rich but cash poor thanks to housing appreciation in recent years and the COVID recession. Large Wall Street landlords are well capitalized and ready to pounce if these owners have to sell for cash flow reasons. Wall Street Journal
The Race is On: Dozens of local and county governments are competing for pieces of $600M in funds California has made available to transform hotels, vacant apartment buildings and other properties into interim or permanent, long-term housing. Bisnow
Lots of Potential: Parking garages in urban markets were once considered a sure thing. However, the rise of ridesharing and densification of American downtowns put a dent in demand. Now COVID-induced work from home has owners and potential buyers of garages and lots looking at alternative uses and redevelopment. Commercial Observer
Chart of the Day
Private housing unit production as a percentage of US households has been on a downward trajectory since the 1970s.
Source: St. Louis Fed via Pike Oliver
WTF
Triggered: A 5th grader was asked to remove a Hooters-themed mask that he had been wearing to school because Florida. News Channel 8
Hoarding: Chuck E. Cheese’s parent company asked a bankruptcy court to approve settlements to destroy 7 billion paper Prize Tickets that have built up in the company’s supply chain as a result of the Covid-19 pandemic, crushing the dreams of kids and adults who like terrible pizza and germ infested ball pits. 7 billion? Did they just continue to print tickets non-stop and let them pile up in a warehouse? Bloomberg Law
Basis Points – A candid look at the economy, real estate, and other things sometimes related.
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