The Global Pandemic: Unprecedented economic disruption is met with an unprecedented policy response. CRE should hold up relatively well

Unprecedented Economic Shutdown

  • Current job losses are an intentional transfer of payroll from private to public sector – in the short term, incomes are more important than unemployment
  • Traditional econometric models are less valuable in this environment; probable economic paths are dependent on science and policy-driven outcomes; fat tail risk
  • Economic Dislocation= f(Duration, Diffusion, Depth)
    • Duration is the top concern…and will impact diffusion and depth…which impacts the ability to restart/rebuild the economy
    • Any plan to open the economy back up will likely be in stages…predicated on aggressive testing, therapeutics, vaccine

Extraordinary Policy Response 

  • Goal is to support incomes and limit sector spillovers
  • FED’s “QE unlimited” is a firebreak preventing negative feedback loops with the real economy
  • More stimulus is needed to support HHs and Businesses…base case expectation is for “whatever-it-takes” policy

Capital Markets and CRE

  • Commercial real estate is unlikely to fully reprice based on credit spreads…low leverage, liquidity, and expectations of temporary (vs permanent) impact on NOI
  • Values may erode based on short-term rent declines (though appraisers slow to react)
  • Longer term, relatively stable cash flows make real estate more favored asset class
  • Hotels and retail see highly binary outcomes.  Accelerates capital rotation to industrial and apartments.
  • Short term, GSEs support apartment pricing; long term, lower interest rates suggest lower going-in yields

MF Market Will Weather Relatively Well 

  • Strong operational and low financial leverage will limit impact of short-term decline in cash flows
  • Housing is a necessity, so demand holds up better than sectors tied to discretionary spending
  • But supply cycle will exacerbate near-term competitive pricing pressures

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