U.S. Recovery Likely Will Slow As Virus Accelerates
Evidence of a promising U.S. economic recovery can be seen in strong gains in hotel occupancy, restaurant dining, credit and debit card spending, mortgage applications and air travel. But the recent flare-up in COVID-19 cases in Arizona, Texas, California and the Southeast region threatens to slow the recovery. If COVID-related deaths increase, political pressure for more restrictive lockdown mandates will build. Even if only in certain states and regions, lockdowns will lessen overall economic activity.
Job growth generally lags GDP growth by three months and leasing activity lags job growth by a further three months. This lag shortens as the economy sustains growth and business confidence increases, but it is longer when the economy is coming out of recession. Unless COVID-19 is controlled relatively quickly, real estate’s recovery will not begin until next year.
The spike in COVID infections undoubtedly means that more economic stimulus will be needed. While this will be helpful in the medium term, what the economy and real estate market really need is a clear route out of the pandemic. The outlook for the global economy is brightening since most other advanced economies have successfully suppressed the virus and are cautiously reopening. Review of Government Policy Response to COVID-19
Stimulus Measures Could Stave Off Distressed Sales
The speed and scope of the federal government’s economic stimulus in response to the COVID-19 crisis has lowered the probability that distressed real estate sales will reach the levels of past downturns.
Over the past 30 years, there have been several notable examples of government intervention during times of financial crisis. These include the Resolution Trust Corp. during the 1980s’ Savings & Loan Crisis and the Troubled Asset Relief Program during the 2008 Global Financial Crisis.
The response to COVID-19 has been built on these historic programs and is highlighted by the $2 trillion CARES program and trillions more in relief from new Fed lending facilities. It is because of the massive government intervention that the level of distress in real estate markets likely will be much less than initially expected.
- Paycheck Protection Program (PPP): This is the centerpiece of the CARES Act, which pumped more than $2 trillion into the economy, including more than $350 billion to small businesses. Funds were used so quickly that Congress appropriated another $310 billion in business aid. The positive impact of the PPP on the real estate industry is evidenced by stronger-than-expected rent collections in April and May.
- Enhanced Unemployment Insurance: The government provided an extra $600 per week to unemployed workers. Combined with one-time stimulus payments of up to $3,400 for most American taxpayers, this effectively protected the necessity-retail and multifamily sectors.
- Forbearance: The mortgage forbearance programs led by Fannie Mae and Freddie Mac in exchange for non-eviction of tenants have been particularly effective. While the single-family market has been hit with a significant number of mortgage forbearance requests, the commercial multifamily sector has seen a much lower amount than expected in part because of the effectiveness of unemployment insurance and the PPP that has given many residents the ability to pay rent.
- TALF: The Term Asset-Backed Securities Loan Facility, which involved bond purchases, provided a significant boost to the CMBS market, causing bond spreads to narrow from their peak of more than 1,000 basis points in mid-March and allow for a modest reopening of the CMBS market.
What Might be Coming
- Liability Insurance: Congress is considering protecting businesses from liability for claims of COVID-19 infections in the workplace.
- Expansion of Main Street Lending: This program for small businesses may be expanded to directly help the commercial real estate industry. The need for this is most critical in retail and hotel loans with CMBS debt but is increasingly important in the office sector because liquidity has tightened significantly.
- Expansions of PPP and Unemployment Insurance: The PPP program has been extended through August, while the enhanced unemployment insurance is currently scheduled to end on July 31 but may be extended.
- Business Recovery Fund: The International Council of Shopping Centers is lobbying for money beyond the PPP and unemployment insurance programs to aid those businesses that are still severely impacted by COVID-19.
- Additional Stimulus: Congressional proposals of between $1 trillion and $3 trillion in additional stimulus could create jobs via shovel-ready projects and prevent further layoffs.
- Federal Pandemic Insurance: Traditional business interruption insurance has either specifically excluded or been vague about covering COVID-related closures. The federal government could offer pandemic insurance like the terrorism risk insurance it offered after 9/11. This will be particularly important to underwriting high-density urban markets where concerns over pandemic risk will remain long after the COVID crisis has passed.
To learn more about the impact of federal stimulus programs on the commercial real estate industry, listen to this week’s Weekly Take Podcast with Jeff DeBoer, president and CEO of the Real Estate Roundtable, and Brian Stoffers, chairman of the Mortgage Bankers Association and CBRE’s global head of Debt & Structured Finance.