Special Update: Covid-19 (Coronavirus) Impact on Commercial Real Estate

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Corona Virus. Well, first of all, I had a cold recently, and some friends came up to me and they said, Larry, are you sick? And I said, yeah, I had the Corona virus, but it really wasn’t a bad case. It was Corona light.

So, let’s compare the economic impact of the Corona virus versus let’s say the financial crisis of 2008. That’s a worthy comparison. In 2008, the entire financial system and the liquidity within that financial system came crashing down and nobody knew when it would get fixed.

At the time, it looked like the inventory of vacant real estate would take a decade or more to absorb.  The massive vacancies were due to the unconstrained construction lending that had occurred leading up to ’08. I remember people saying ‘Oh, well, Florida has a 20 year inventory of vacant homes,’ or ‘office space, you know, has a 9 year inventory of vacancy before it’s absorbed.’ So if you’re a fool, go ahead and buy it”

In 2020, we’re looking at a virus which is serious and I don’t want to downplay it. But even if it takes a year or more for a vaccine to be found, it’s a temporary situation.

Now, I don’t want to be morbid, but some people may die, and there may be a temporary recession. But generally, in a situation like this, where there’s a finite period of time involved, you would expect a snapback similar to some kind of a calamity, let’s say a hurricane, earthquake and that sort of thing when we experience a one-time catastrophic event.

Now, in this case the coronavirus could extend for months, and there’s a lot of things we don’t know but we do know that it is fairly likely that within a year a half or less we’ll have a vaccine and that this will be just a bad period of time. It’s very possible that after a vaccine is found, we could see a rapid snapback.

The financial system is in much, much better shape than it was in ’08 because the balance sheets of our mortgage lenders is many multiples better than they were in 2008. In other words, our lenders could withstand a significant amount of loan losses and still stay in business. And their borrowers are not leveraged up to the hilt where they were in 2008. The amount of new supply of office space is far less than it was in 2008. An argument could be made that apartment building lending has become more lax over the years, but still not as bad as 2008, or the period leading up to ’08. So for all of those reasons, I don’t think we’re headed for a severe real estate recession.

Another item to think about is that the ’08 interest rate levels were much higher than they are today. These interest rates that we’re now experiencing are so low, that borrowers can basically see occupancies plummet and still be able to pay their debt service in many cases. So, for example, we have a building right here in downtown Tampa where our interest rate is about 150 over LIBOR. LIBOR is now down in the low ones. So, our total interest rate is about two and a half percent.

I haven’t run numbers, but if I just do them roughly; I think we could go down to a 40 or 50 percent vacancy and still pay our debt service in that building. So, for all of those reasons, I don’t see this anywhere like an ’08 situation for real estate specifically. Now, will it have impacts on the economy? No doubt. Could we actually teeter into a recession? Very possibly. But in terms of the real estate industry in 2008 versus now, I think it’s night and day.

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