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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.
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