RentPrep Podcast #306

In this news roundup we look at articles from across the web to get expert opinions on how COVID-19 will impact real estate valuations going forward.


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Show Transcription:

Eric Worral: (00:00)
Hey everybody. Welcome back to another episode of RentPrep for Landlords. This is episode #306 and I’m your host Eric Worral. And today we’re going to be talking about the impact of COVID-19 on real estate going into the future. I know that right now it’s a, you know, a lot of things going on, a lot of uncertainty people wondering what’s going to happen with their rental properties or what, you know, real estate is going to look like going into the future. And obviously there are more important things going on right now, but this is an episode and a podcast geared towards landlords. So we want to talk about the impacts of real estate. Have got some really great articles from Forbes, an NYU professor, a marketplace.org and a propmodo.com that we’re going to kind of go into different, various niches and different areas and kind of see what we can get from the experts and what they’re saying about the impact of COVID-19 on real estate.

Voice Over: (00:54)
Welcome to the RentPrep for Landlords podcast and now your host, Eric Worral.

Eric Worral: (00:59)
All right, let’s get right into it. Our first article is from forbes.com the author is Ellen Paris and the title isThe Latest Numbers On Coronavirus’ Impact On The Residential Real Estate Market. And again, that’s from forbes.com. So what they’re this article here is talking a lot about some research done at realtor.com and it said that they just released their numbers for the month of March, which not surprisingly changed significantly over 31 days. So the chief economist at realtor.com Daniel or Danielle Hale said the month started out to be strong spring buying season, which is what they expected. But the impact of COVID-19 materialized in the later half of March. Week by week they’re seeing decrease in new listings. So this is more so, you know, I’m not talking about rental properties, but actually the sale of properties.

Eric Worral: (01:47)
And I said it’s no surprise that sellers who don’t have the hat to sell right now are rethinking, listing their homes and buyers who aren’t under pressure purchase a home are also pulling back. So inventory declines, a key market indicator are also slowing. So we’re seeing buyers hesitating as much as sellers now, where in February they had a lot of buyers out there actively looking and not enough inventory. So here are what some of the numbers they are finding. For the month of March that look like the numbers of homes for sale declined 15.7% year over year. And despite the decline, the national median listing price grew 3.8% to 320,000. So when realtor.com look at the weekly data, including the last two weeks of March as the coronavirus hit more pros to the country, listing prices were growing at the slowest paces for 2020. So here’s some more of the data here.

Eric Worral: (02:36)
And the weeks ending March 20 version March 28th, new listed properties decreased by 13.1% and 34% compared to the year before. So where you know, coronavirus started hitting COVID-19, March 21st we saw a decrease in 13.1% in listings of properties compared to the previous year. And then just one week later, March 28th, we saw 4% dip compared to the year prior on the same week. So this supports recent surveys conducted by realtor.com pointing to declining interest for potential buyers and sellers. So looking at some specific markets around the country in different markets, the biggest declines. So the Phoenix-Mesa-Scottsdale, Arizona market saw a 42% decline in properties listed walk saw 36% decline in San Diego, saw 33% decline. Now I don’t know what the connection between those three are cause I feel like those are three very different areas. I mean you can make the claim that San Diego and you know Phoenix, Arizona kinda area where you know, retirement areas and maybe that’s being impacted there, but I can’t understand them why Milwaukee would be thrown in there.

Eric Worral: (03:44)
So there may be, there’s some something specific going on there. But it said that there was only one market that actually saw an increase in inventory, and that was Minneapolis, Saint Paul, which was at 3.6% increase as far as the steepest declines in prices, a Dallas Fort worth area. So a negative 2.7% decline. Minneapolis, Saint Paul despite their increase in inventory side decrease in pricing at negative 1.4%. And the Houston area saw a negative 1.4% as well. The last thing they said here is that for people that have to buy right now, they’re more likely to get a good deal since there are fewer people out there. Conversely, sellers who must sell now know this and must respond to these current market dynamics. So we’re going to move to the next article here. This one is from marketplace.org. The title is Pandemic Could Mean Opportunity for Real Estate Investors, although there was a, some interesting insights here.

Eric Worral: (04:40)
I’m not gonna read the whole thing, but Daniel Lebensohn, co-founder of the investment firm BH3, said that buying distressed that built the foundation of his company. So he kind of started his company in Florida where there was a South Florida. There’s a lot of distressed properties back in 2008 2009 he said that nobody feels good about taking advantage of misfortune, but firms will be looking at this pandemic and the same way he said, now’s the time to innovate and go hunting because there will be opportunities. He said, phase one is really a repricing opportunity and I think the acquisition comes a little bit later, maybe six months down the road. That’s because the real estate market moves slowly and this pandemic is only a month old in the United States. It’s not as if anybody who owns anything is suddenly gonna step up and say, Oh, sure.

Eric Worral: (05:24)
A month ago I could have sold this building for $400 a foot, but because I’m afraid what’s happened in the market, you could buy $200 per square foot today. That’s according to Jim Costello, senior vice president at real capital analytics. He said it could get there at some point, just not yet. And the hospitality sector is going to have an especially difficult time weathering the storm. Some of the areas like hotels and travel related the restaurants, many of those are fairly tight on their cash flow and could actually be facing a situation where they need a buyer fairly soon. And retail office-based, one part of the market that many is really saved could be compromised because so many people have learned to work from home.

Eric Worral: (06:06)
So we’re going to be talking about that a little bit more too. But interesting article there from marketplace.org and I will have all of these links in the description today’s show notes. So if you want to kind of read some of these a little bit more I’m going to pull out a little bit of a section of, from this article propmodo.com. Doesn’t listen author, actually let me go to the bottom, maybe that… Okay! Franco Faraudo, editor and co-founder and they got an NYU professor here. So I’ll read this paragraph to you cause this might be a little a little bit helpful. The title is Winners and Losers of COVID-19 Real Estate Moratoriums and Forbearance.

Eric Worral: (06:41)
So he said, he asked Tim Savage, clinical assistant, professor of real estate at NYU shack Institute of real estate, what he thought would happen to commercial property values if a large number of renters were not able to pay rent for a short period. He said, if we think about real estate as an asset class, it’s value isn’t entirely by short term rent rolls. He said in the short run we will see perceived values fall. But this is a natural disaster, not a financial crisis. This hasn’t effected the capital. It has just affected the human capital. The volatility and pause and transactions that we are seeing is just a reflection of uncertainty and the absence of data. All we have is uncertainty.

Eric Worral: (07:25)
So I thought that was pretty interesting. You know, he’s just kinda saying that comparing this to the housing crash of 2008, 2009 he said that this is very different because this is a natural disaster, not a financial crisis. And really right now what we’re in is this period of uncertainty. So what they did say is they looked at the perceived value of real estate can often be best understood by looking at public market rates. So they took a look at those. And this is kind of interesting because like Brookfield Property REIT, if you’re not familiar reading, it’s just a, you know, you can actually buy a I apologize if my language and lingo is not criteria, but you can buy a share of a read just like you’d buy a stock. So then you’d actually are buying a real estate, but you’re really just owning like a share, just like you would have stock in a company.

Eric Worral: (08:11)
But instead of it being in a company, it’s in a company that owns a bunch of real estate. So Brookfield Property REIT, a giant fund with a large mom. Retail portfolio is not surprisingly down 50% of its market capitalization from the end of January. So a blue rock residential growth rate is one of the largest multifamily portfolios is down about the same, but Boston properties, which owns mostly class a office space and top tier cities is only down around 30%. And the industrial real estate giant prologue is, is only down around 20%. So the thought being that the quarantine will strengthen the value of the supply chain companies and thus industrial warehouses will not suffer the same kind of losses as other sectors. So I’m probably saying it wrong, but prologue is a, they are more focused on warehouses and that kind of real estate where ones that are focused on malls and large multifamily portfolios are the ones that are down the most.

Eric Worral: (09:06)
And then like I said, Boston properties, which owns class offices and top tier cities is only down 30%. So that’s kind of interesting. Just kind of looking at the different rates that are out there and which ones are being impacted in different ways. Kind of giving you an idea of what might be going on or what you might expect or at least what the sentiment is across the landscape of, from different investors. I think that’s pretty interesting. So moving to another article here, we’ve got a bunch today. I found a lot of these interesting, I just wanted to kind of share them and move through them quickly. This article is again from forbes.com from Ellie Perlman. The title is How An Economic Crisis Can Impact Real Estate Investing. She is the CEO of Blue Lake Capital LLC. So an investor herself and she says that the possible impact number one, no, I will preface this, these are all possible, right? Nobody knows for sure what’s going to happen, but we can still speculate.

Eric Worral: (09:58)
Possible impact number one is real estate prices will go down. She says, I believe we will see commercial real estate prices dropping as foreign equity, which is constantly looking to buy real estate in the US will have issues with accessing US markets. The outbreak will affect their ability to invest overseas. Flying to the US from Asia and Europe is becoming more and more problematic, which hurts foreign investors ability to do business here in the near future. Since many foreign investors look for much lower returns than local investors, they are able to offer higher prices for multifamily properties with a decline in foreign investments in the US market. The demand to purchase multifamily properties will experience a decline resulting in lower prices. That’s pretty interesting. Pig hadn’t heard that one before. I’m reading up on things just saying that you know, foreign buyers are going to have a hard time purchasing a commercial property in the US and I should mention that this article is from April 6th so it’s pretty recent as of publishing this podcast.

Eric Worral: (10:55)
Possible impact number two is vacancy and bad debt rates might increase. And now there’s one you could probably, you know, extrapolate on your own. But basically it’s saying that vacancies and multifamily properties might increase particularly in sub-markets where employment is dependent on entertainment. So let’s say vacancies and you know Las Vegas, right? Las Vegas is definitely a city that you would imagine would be hit pretty hard by this. It’s the entertainment capital of the world. Last thing people are going to do when their pockets are pinched is go to Vegas and you know, spend a bunch of money and you know, partying well at least most reasonable people. I say this cautiously, but I believe that there’s a good chance that these events will trigger a recession due to the massive disruption in the global supply chain. Since entertainment is considered a luxury, most people tend to cut entertainment expenditures when there is a recession.

Eric Worral: (11:41)
Unfortunately, if that happens, many employees work in the entertainment field will lose their jobs. When people lose their jobs, they aren’t able to pay their rent, which leads to higher vacancy rates as some tenants will be forced to move out to a cheaper. It also leads to higher bad debt as nonpayment of rent is considered a bad debt. And many property management companies will work with collection agencies to collect those debts. Also with layoffs and unemployment, there wouldn’t necessarily be qualified new tenants available to replace these or replace those who are evicted for bad debt. In addition to high vacancy rates can wreak havoc where the properties and that operating income. And if it’s significant enough, it could seriously impact investors ability to pay the mortgage debt. The domino effect can cause serious problems and extreme situations for closure by the lender if the loan can’t be repaid.

Eric Worral: (12:28)
So basically that’s what that whole possible impact is a domino effect, right? Especially areas where there’s a lot of entertainment people losing their jobs, people not being able to pay rent, people who own those properties, not being able to play mortgages. And you’re just kind of seeing this larger, larger and larger domino falling as the ball gets rolling there. So that’s one possible impact. This third one, I don’t agree. But we’ll read it anyways. Possible impact number three, increased demand from local equity. And I’ll get to why I don’t agree with that, what she’s saying here. But positive impact could be an internal capital flow towards real estate. Many US investors will do what I did, which is pull their money out of the stock market. Those investors will be looking to put their money into real estate, which extort extraordinarily is more stable than the stock market. I believe that more capital will flow into multifamily real estate from local U S investors, which can counter the decline in demand for multifamily. It might be able to stabilize prices or prevent a major decline in property values. So what can you do if you’re looking at a prospective deals, a rate, very conservatively account in your analysis for rising vacancies and bad debt. If the deal is still works, then it’s a good deal. But even if a conservative and your income projections in a recession, you might have to give higher discounts to bring a new tenants.

Eric Worral: (13:47)
Well, the only thing I was going to say that I disagree with a little bit here is, you know, telling people that pull their money out of the stock market. That’s great if you thought of that, you know, the beginning of March, but if somebody reading this article, I mean, this article is posted, like I said, on April 6th, I believe it was. Yeah, April 6th. I wouldn’t be writing anything about pulling your money out of the market right now cause you’re just selling low so that you can move money somewhere else. I don’t think that’s the best strategy, but I digress. Last article, really enjoy reading this guy’s writings. Professor Scott Galloway. I may have mentioned to his book before on the podcast, it’s called The Four. He’s also has another one which is The Algebra of Happiness, which I haven’t read yet, but The Four was just kind of a, he talks about like the four big companies that the first one to break a trillion dollar valuation, Facebook, Amazon, Google, and Apple, which Amazon was the first to do that. But NYU professor with a background in marketing and economics and this article is Post Corona: Higher Ed. Now I thought this was interesting because I feel like there will be some some things that landlord investors, especially around higher ed might be interested in.

Eric Worral: (14:58)
So one of the bullet points here from his article is that which was posted on April 3rd, is that things won’t change as much as they will accelerate while other crisis is reshaped the future. COVID-19 is just making the future happen faster. So he says, let’s talk about higher education and make some predictions and industry projected to registered 10 trillion globally by 2030. May see the future happen faster. If you read this blog, you’re intimately familiar with the below chart highlighting what we academics could not resist the temptation to starch the surplus margin so we can make some more money and be less accountable. So he’s kinda got like a funny way of saying things. Basically what the chart is is it’s U S education prices versus inflation from 1998 to 2018 so from 1998 to 2018 polls starting at 0% cause you know we’re starting the graph off in 1998 we have seen inflation increased by 54% since 1998 and what is your guests on?

Eric Worral: (15:55)
How much education costs have inflated by now? You’ve probably heard these numbers thrown around before but isn’t nearly three times as much. So education prices have inflated by 150% since 1998 even though the economy’s inflation is only by 54% and the a source for that is the college board. So he said, yes, you’d be likely, no, there’s more student loan than credit card debt, but they didn’t know the price of a textbook has exploded 812% in the last 30 years. It’s pretty crazy. So as prediction is that university campuses in New York, Massachusetts, California, Washington, forgive me, I’m not even sure what LA is that Louisiana, I got to look this up. L a a state can show you guys how little I know. Yes, Louisiana are the other States that were being closed for the remainder of 2020. So what he goes on in the article to talk about is the thing that’s going to be accelerating is distance learning. And so if you have all these States, especially like, you know in these California, in New York, Massachusetts with a lot of big universities that are doing all of this and still learning it’s going to accelerate the adoption of distance learning for people. And what he is claiming is that you will see that the bigger universities with great teachers will start to have larger classrooms because of distance learning and accepting more students and you’re going to start seeing a major disruption in colleges.

Eric Worral: (17:23)
So this is kind of interesting because if you’re thinking about buying property around your local university or you own a lot of property or on your local university, this is definitely something that will affect you. I think just here in Buffalo, right? We have a pretty big campus about, I think like 30,000 students at university of Buffalo. And I know that you know, in different areas there’s a ton of housing there to support those. Well, what would happen if all of a sudden half of the students are distance learning, so they’re in different States or they’re across the state or something like that, and they’re no longer actually living here, but they’re just taking classes online. The value of those rents, the value of those properties would go down substantially. You know, that has been a great investment up to this point because, you know, you could buy a $60,000 house here five years ago, then get pretty good runs for it.

Eric Worral: (18:15)
But I think that stuff is has the potential is change and shift. So that’s definitely something you want to keep an eye on if you’re an investor in those areas. Is if it distance learning could impact and disrupt higher education. Because certainly you’ve probably heard this before, there may not be an industry that’s more primed for disruption than higher education just due to the ridiculous costs. And in the article he does point out the fact that there’s this innate kind of desire for parents who want the best for their kids. And that’s why you have continually seen this increase in prices because parents are willing to step up and help their kids to do what’s best or what they think is best for their kids. But it’ll be super interesting to see what happens. So I thought that was a really interesting article.

Eric Worral: (18:59)
And if you kind of like somebody with a little bit of bite to their writing, you know, it’s definitely not if you’re easily offended by Scott Galloway’s writing on a profgalloway.com is pretty good. I’ve been enjoying reading his takes on what’s been happening in the local economy and national economy. All right guys that is it for this week’s episode. Wanted to kind of just get into just what’s going on in the news and kind of speculation more than anything, right? I don’t think any of us really know is gonna happen or what’s going on right now. But it’ll certainly do be a different landscape going forward. But it’ll be interesting to see what all falls out. But of course, number one priority is staying safe, staying healthy, you know, making sure you’re practicing social distancing and making sure that you know, you’re, you’re doing what you can do and control on your, your area, your environment. So take care of your family, reach out to people you haven’t talked to in awhile, and hopefully you’re doing well. All right, guys, until next week, have a great week and take care.

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