Corona Virus - Winners and Losers

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Just when things were cruising along nicely this year and the most spirited water cooler debates were upon whom would win the Batchelor this season or Democratic presidential hopefuls - WHAM! The reaction to COVID-19 has disrupted our world akin to the terrorist attacks of 9.11 or the financial meltdown of 2008. The new Marvel Incredicoaster at California adventure has nothing on our E-ticket stock market ride of late. Descending into bear market territory - the markets have been in free fall attempting to price in the future impact of economic uncertainty today.

The Losers. Our global economy depends upon the flow of goods and services. Read. People consuming. When the music stops as it has this week - folks put the kibosh on spending. Imagine the carnage of lost dollars from cancellations of sporting events, concerts, amusement park attendance, conventions, and travel. Our city coffers partially rely upon sales tax revenue generated from hotel beds, restaurant meals, and souvenir shopping. With the suspension of events such as the Big West Basketball tournament, visits to Disneyland, Long Beach Grand Prix, and postponement of NHL hockey games and the MLB season - revenue is lost - in some cases forever. Strained municipal budgets result. Will city layoffs follow? Businesses that rely upon conventions, concerts, and live sporting events as their lifeblood will suffer. Think about operations that build exhibits, printers who create banners and advertising collateral, companies who provide security or suppliers of temporary power for open air gatherings such as Coachella and Stagecoach. I’m aware of a local enterprise that rents lighting for large outdoor venues. Wonder how he is feeling about the future of his business? With students at CalState and UC schools now attending classes on line - the campus proximate coffee hangout now has no customers. You get the idea.

The winners. In my experience - with every economic downturn there are winners. Entrepreneurs who benefit - either by brilliance or dumb luck. So just who will find the silver lining? Because of a decrease in global demand and the Saudis and Russia playing footsie with supplies - oil is less than $30 per barrel. Petroleum based raw materials will become cheaper. Therefore anyone manufacturing with them such as molding plastic - medical devices, trash containers, kitchen items, coat hangers, and auto parts will all bring finished goods to market with less expensive components. Speaking of petroleum. Gasoline prices will tank - sorry - making that trip someplace more economical. Trucking can reap rewards as can driving your car - albeit to fewer places that are open. Delivery services should see an uptick in business as people avoid shopping in person in favor of on-line ordering. How about video conferencing providers such as “go to meeting” or Zoom? Zoom stock is up 60% as they fulfill record demand for their product. The biggest winner could be the mortgage industry - ironically the biggest loser in the 2008 slide. With a declining stock market - money seeks a safe harbor - such as treasuries and precious metals. As demand for T-bills increases - so does the price. Lower yields result - last week less than 1% - making that 30 year loan the cheapest ever! My sense is refi fever is stronger than the symptom associated with COVID-19.

In this author’s humble opinion - we are going to be OK. Sure. We must weather some short term pain - for some excruciatingly bad pain. But we’ve overcome tougher obstacles - a Great Depression, two World Wars, Orange County bankruptcy, 9.11, 2008 Great Recession. We are a resilient nation. We got this!

What Blackjack and Commercial Real Estate Have in Common - 5 Things

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I love to play blackjack I should say, I love winning. The losing, not so much. That is why I don't gamble anymore - the losing! Regardless of my mathematical methods of manipulating my money, the result was too often predictable - the house ended up with my hard earned wages.

Painfully reminded of my aversion to losing was I on a recent weekend. We traveled to Las Vegas for "Mike Madness" - a term we coined (like that?) for the celebration of our middle son's birthday. Countless hands of blackjack were played and lost by my wife and daughter. Fortunately, they are small time gamblers - twenty bucks is a huge loss - so we had gas money for the trip home and the equity in our home is untapped.

So just what did playing blackjack teach me about commercial real estate? Allow me to deal you a few hands and we will see.

You gotta stack the odds in your favor. When I played, I would search far and wide for a single deck table. Rarely would I sit down with a shoe wielding dealer (multiple decks for those of you who prefer to visit Florida). The reason is simple. The odds are better for you with fewer cards. Working with control is a way to tilt the odds in your favor in a commercial real estate transaction. There is still no guarantee, but at least if a deal is made, you are involved.

Don't play if your stake is too small. You have to be willing to watch your pile of chips dwindle as the deck turns in your favor. Generally, things will rebound if you're adequately staked. Too many newbies (and vets for that matter) enter the commercial real estate game with improper staying power. If you can't withstand a dry spell, you're forced to work on deals that are quicker and smaller or worse - you compromise your ethics to close a sale.

Play the percentages. Always split aces and eights or double down with an eleven if the dealer is showing six or fewer. You can occasionally hit a twelve if the dealer is showing seven or better - but I prefer to stand pat. Work on high percentage commercial real estate deals - not the airport runway that is purportedly for sale that you eavesdropped at your kid's baseball game.

Avoid playing with amateurs. How incredibly mad are you when the last guy to the dealer's right hits with a two up and the dealer showing four? Invariably, the guy busts with a ten rather that let the table benefit from the dealer exceeding twenty one. Too often, in the world of commercial buildings, we are on opposite ends of a broker who isn't a pro - and the deal suffers.

Cut your losses. Sometimes, in blackjack and commercial real estate - you just gotta move on to the next transaction. I'm guessing if your client is ducking your calls, you shouldn't spend the fee.

Just remember, that squeal of delight that you hear when the blackjack dealer busts or your colleague closes a nice deal probably started with the above points in mind.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

What Does the Coronavirus Mean to Commercial Real Estate?

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According to Wikipedia - “Coronaviruses are a group of viruses that cause diseases in mammals and birds. In humans, coronaviruses cause respiratory tract infections that are typically mild, such as the common cold, though rarer forms such as SARS, MERS and COVID-19 can be lethal. Symptoms vary in other species: in chickens, they cause an upper respiratory tract disease, while in cows and pigs they cause diarrhea. There are no vaccines or antiviral drugs to prevent or treat human coronavirus infections.

OK, “so what?” you might ask. How will the potential COVID - 19 pandemic affect commercial real estate? Indulge me while I review a few ways.

Uncertainty. When the stock market gyrates wildly as it has for the past few days - some people get nervous. After all, trillions of dollars in paper wealth have evaporated. As folks glance at their diminishing 401 K balances - an air of uncertainty balloons. If resulting angst causes consumers to hit the pause button on spending - a ripple forms in the ocean of economic activity. When attendees avoid concerts, sporting events, movies or their favorite restaurants - businesses suffer a decline in sales. Operations who supply these enterprises - trucking, food, linens, security, novelties - then feel the pinch as the ripples become waves of lost opportunity. All of these rent or own commercial real estate. You get the idea.

Supply chain disruption. As mentioned last week - steel production is down 90% in China. Auto sales in Asia? Off a whopping 95%! One of the Port of LA’s largest exports is auto parts. Couple these factors with the typical container cancellations during the Chinese New Year and you create a lag in product delivery.

Travel. Hotels, airlines, rental cars, tickets to Disneyland, Knott’s or Universal - yep! Much of Orange county’s economic vitality is reliant upon tourism. Postponing travel equates to lost revenue for all who depend on customers to serve.

Interest rates. If there is a bright side - it may be favorable interest rates - as commercial real estate financing becomes more affordable. Mass stock market sell offs generate a load of proceeds which must be invested. Typically a safe harbor for this wad of cash is short term instruments such as Treasuries. As the demand for T-bills increases so does the price. Price increases cause returns to react inversely. According to CNBC - “The 10-year U.S. Treasury yield plunged to a fresh record low on Friday as investors dumped riskier assets and searched for safer options amid the coronavirus outbreak. The benchmark rate traded around 1.16%, marking the first time ever it traded below 1.2%. The 2-year rate slid to 0.95%, its lowest level since Nov. 2016. Yields move inversely to bond prices, which are rising as purchases surge. The 10-year yield has tumbled 25 basis points this week alone as the massive sell-off in stocks intensified.”

Well, at least surgical mask sales are on the rise.

Recessions - Ugh!

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This week, I enjoyed a group meeting featuring key note speaker Robert S. Keebler of Keebler Associates, LLP - a public accounting firm from the Midwest. Actually, he hails from Green Bay, Wisconsin. However, since I grew up a Dallas Cowboys fan - it’s tough for me to write the city name lest I harken back to the 1967 Ice Bowl - which broke my heart as well as low temperature records. But, enough of that.

The topic of Mr. Keebler’s talk was “strategies for getting the most profit to the bottom line.” Quite compelling and interesting was the subject and ensuing discussion.

Preceding the lecture was a brief outlook for 2020 by our host - Northwest Mutual. The Cliffsnotes? We should be OK through mid year when the outcome of our presidential election will permeate the air waves and suck the collective oxygen from most conversations.

Mentioned during the preamble was a check of five factors which cause bear markets - inflation, recessions, commodity shortages, crazy market valuations, and uncertainty. Since I’ve plied my trade since 1984 - I’ve experienced a number of commercial real estate bear markets - 1991-1993, 2000-2002, and 2008-2010. So, I decided to do a bit of unscientific noodling to check the five factors against my experiences with the down markets and if any of those factors might be in play today. Full disclosure - I’m not predicting a buyer’s market anytime soon.

1991-1993. Kuwait was invaded by Iraq in August of 1990. We experienced amazing growth in commercial real estate values beginning in the mid eighties and the Reagan “trickle down” policies. Savings and Loans - remember them? - were de-regulated and money was flowing freely into properties - causing a spate of new development. With the collapse of the S & Ls, Gulf war, and dramatic overbuilding - the economy plunged into recession. Global uncertainty, a shortage of capital, and unsustainable values were the culprits. Turn around didn’t hit full throttle until 1995.

2000-2002. Also known as the dot.com age - we witnessed commercial real estate investors purchase old, obsolete, warehouse buildings with proximity to phone infrastructure to house the burgeoning technology needed to power telecom - precursor to e-commerce of today. With the election year of 2000 came a burst of the dot.com bubble. No longer were the buildings needed for telecom applications. Given the obsolete nature and high prices paid - many were foreclosed. Terrorist attacks of 2001 created enormous uncertainty as the world adjusted to new travel security measures. So crazy valuations and uncertainty were villainous.

2008-2010. The Great Recession! Liberal lending policies, securitization of bad loans and government guarantees of their performance caused the housing market to crater. With the failure of Bear Stearns, Lehman Brothers, Country Wide Mortgage and others plus the ensuing government bailout - asset values plummeted, lending froze, uncertainty prevailed and those of us in the commercial real estate business reverted to survival mode. Commercial real estate went on sale in early 2009 and buying activity commenced in earnest. Mountains of investment dollars poured into industrial, retail, and office buildings. The music continues today. I’ve stopped predicting when it will stop.

Today. Recessionary fears are in our rear view mirror - or are they? Storm clouds. The Corona Virus is wreaking havoc on the Chinese economy - causing a major disruption in our supply chain. Steel production in China is down 90%, automobile purchases in China down 99%, visits to movie theatres down over 90%. Look at the resulting prices in oil - $52 dollars a barrel at last check. Silver lining. Interest rates are low - with the Fed possibly taking another cut soon. Domestic consumer confidence is high. Net, net, net - I believe we’ve another six to nine months before the uncertainty of an election year is upon us.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.