S.E.C. Real Estate Observer

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Black Swan

Is the Coronavirus the precursor to a recession? This past week, the stock market lost approximately 15% of its value. Is this overreaction to a media-induced problem? Or is this a “black swan” that will take the world economy into a recession? A black swan is defined as “an event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict.”

As I write this article, I am in Ohio doing scheduled site visits on two industrial portfolios. I just met with a major Japanese company to discuss extending their lease of a 65,000-square-foot industrial building. The issue of the virus and the resulting stock market drop came up. Nonetheless, I was successful in leaving the meeting with a two-year renewal.

This company is launching a new product line, and they would not commit to longer than a two-year renewal because of uncertainty of where the new product would be produced as opposed to the impact of the Coronavirus. However, they had, just the week before, cancelled a corporate meeting in Japan because the US officers could not travel to Japan because of travel restrictions.

At this same three-day trip to Ohio, I negotiated an expansion of an existing tenant, a local pharmaceutical company specializing in veterinarian medicine. In these discussions, the Coronavirus and the drop in the stock market did not even come up.

Larger companies will study the impact from the virus in minute detail. They will hire experts and consultants to predict the impact on their business. Smaller companies will continue with business as usual until their customers and vendors alter their actions.

What conclusions can be drawn from my recent experience? I believe that companies want to continue expanding and continuing the economic expansion as the longest running expansion in history. I feel that companies will attempt the status quo as long as they can. However, some companies and industries have already experienced a major drop in business. Any businesses in the travel industry, such as hotels, cruise ship operators, airlines, aircraft manufacturers, and others, are already feeling the impact. It would be a great error to ignore the potential impact. The main question is, how extensive does this problem grow before it is contained?

My advice from my last article in the Observer was this: do not make fast and emotional decisions. Stay liquid. Watch key indicators. Talk to your tenants, vendors, and investors. What are they seeing? I would not overreact and dump a stock portfolio or sell a real estate portfolio without proper reflection. I personally know of real estate investors who sold properties in the last recession out of fear. Looking back at the last ten years, they would have received far greater returns from holding the course. Utilize your relationships within the S.E.C. We are geographically diverse. Within the S.E.C., there is great diversity within product types. There are many years of experience represented by S.E.C. members. Utilize these relationships to gather other opinions on the issues. After this thorough evaluation of the issues and how they impact your personal portfolio and that of your clients, you will be poised to make the right decision for your specific circumstance.

In my next article I am going to discuss “Megatrends.” If you have not already done so, I would encourage you to read John Naisbitt’s books on this topic. The Japanese company that I met with in Ohio is studying the impact of the virus on their vendors that supply materials for the manufacturing of their products in the United States and other foreign countries. There is a lack of transparency by the Chinese government on the statistics and details of the virus. This Japanese company is suggesting that the trend of US companies sending manufacturing jobs to China may change, and some of these jobs may come back to the United States as a result of the virus and how the Chinese government has handled the crisis. Naisbitt defines a megatrend as “a general shift in thinking or approach affecting countries, industries, and organizations.”

Timing is everything in real estate. If we as S.E.C. members are students of the economy, and if we stay alert to megatrends, we and our clients can prosper in good times and bad times. Stay tuned.