By Meghan Hall
Coronavirus has taken the national economy by storm, emerging as the black swan that could mark the end of the largest economic cycle in United States history. As of April 9th, 16.8 million have filed for unemployment in the past three weeks, according to the U.S. Labor Department. That number has now exceeded the number of those who filed for unemployment during the Great Recession of 2008-2009, when 15 million Americans filed for unemployment. However, according to experts at Marcus & Millichap, U.S. recovery moving forward can be largely informed by lessons learned during the last recession 10 years ago.
“[This is] an unprecedented human and economic crisis…,” explained Marcus & Millichap’s President and Chief Executive Officer Hessam Nadji. “The current reality points to a global mission, a very clear global mission, of mitigating and defeating this pandemic. That is job one. The number one priority that is going to drive what happens to the economy, and all of the different industries, including ours, that are so closely tied to the economy.”
Before anything can improve, Marcus & Millichap emphasized that the U.S. will need to learn how to best mitigate the health crisis that is keeping so many businesses closed.
“Headline numbers are coming out,” added Nadji, in reference to the number of people filing for unemployment. “Of course we are going to see a lot of pain on the unemployment side.”
Many of the impacts on the commercial real estate industry have yet to be seen; however, when it comes to some property types, strong fundamentals and momentum from the fourth quarter of last year and first quarter of this year may help to buoy those effects.
Multifamily, for example, had historically strong fundamentals prior to COVID-19, explained John Sebree, senior vice president and national director. From a national perspective, multifamily product has not been overbuilt during the last market cycle, and vacancy rates, particularly for Class B and Class C product, were hovering at about three percent. Demand for workforce housing will also likely remain strong, Sebree noted, if potential buyers decide to put off purchasing a home due to current economic conditions.
“I think that going forward, one of the things we have to look at is just how incredibly strong the multifamily industry was,” said Sebree. “Owners see it as a short-term issue [and] feel strongly about the overall market.”
For now, owners of multifamily product are evaluating rent rolls and rent collections, and focusing on maintaining basic services and maintenance as they evaluate how their bottom line will be impacted moving forward.
Similarly, office landlords are also having discussions with tenants, and companies who are leasing space are taking a closer look at their contracts than ever. New leasing activity for office product, at this point, noted Marcus & Millichap’s Senior Vice President and National Director of Office and Industrial, Al Pontius, has ground to a halt. Companies are not just evaluating their bottom lines now, but how they will use their office space even post-COVID-19.
Pontius stated that the office market can take two very different directions moving forward. “On one extreme, we have all learned to work at home, and demand for office space will shrink,” he said. “On the flip side…we might want flexibility, but we don’t want isolation.”
For those firms who are in retail or who occupy industrial space, going virtual can be almost impossible.
“Industrial has been kind of the industry darling, certainly all of the way through the start of 2020, but it is now under pressure also,” stated Pontius. “One area of industrial that might be a disadvantage in the immediate case: industrial can’t go remote.”
However, Pontius stated that long-term, the outlook for industrial is likely very good, as e-commerce continues to grow. “You now have an entire population of people that had not adopted an online behavior being forced to learn it…E-commerce is getting a second wind as you look out a little bit further, largely because of what we are experiencing this minute,” he said.”
Retailers, depending on the type, will also face strong headwinds according to Scott Holmes, senior vice president and national director of retail. The entertainment-based anchors like fitness centers who became so pivotal to multitenant retail are now trying to figure out just how to get by. So much of retail’s evolution in recent years, explained Holmes, was due to multitenant assets relying on experience-based businesses to drive traffic.
“It was all about creating an ‘internet resistant’ tenant mix in those places,” said Holmes. “All of those hottest segments are now being the ones hardest hit.”
Now, traditional grocers, drugstores, corporate credit drive through tenants, and stand-alone, single-tenant retail is faring better. For now, sales of these assets are moving forward and closing as planned.
While the state of real estate fundamentals across the board remains to be seen, Marcus & Millichap noted that lessons learned during the Great Recession have prompted both government officials and those involved in the industry to spring into action quickly.
“The contrast is that we started out with a healthy financial system, and the health crisis and the economic shutdown that ensued are creating these unprecedented conditions which are leading to this economic damage that is much bigger in scale which could then threaten the financial system,” said Nadji. “It is this dynamic that is causing this massive, decisive, government action unlike we have ever seen.”
The government recently passed a $2.2 trillion stimulus bill in an effort to keep individuals and businesses afloat over the next several months. The bill is the largest stimulus in the history of the country and is about 10 percent of the United States’ GDP. The move is extraordinary, stated Marcus & Millichap, because during the Great Recession, it took nearly a year to pass the Troubled Asset Relief Program (TARP), a $700 billion stimulus bill, and as a result, recovery took longer. This time around, the government acted much quicker.
In addition, the Fed has announced hundreds of billions in quantitative easing, and has opened their doors as a direct lender for the first time in an effort to guarantee liquidity of the financial markets, thus alleviating some investor hesitancy.
“They are trying to stem the flow of people moving into unemployment to keep the engine idling, to keep it running, through this severe headwind,” said John Chang, senior vice president and director of research services.
However, much of the uncertainty surrounding the health of the market will only be resolved depending on how quickly we are able to resolve the current health crisis. Marcus & Millichap, believes that recovery could happen as early as the fourth quarter, and that it could be quick due to pent up demand. At the end of the day, though, many businesses will still suffer.
“Some will also not make it through this,” said Nadji.