S.E.C. Real Estate Observer

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The virus entered our world sometime late 2019 or early 2020. I do not think anyone knows for certain when and how. However, life goes on, and each of makes it the very best it we can. We still have a crime rate, we still have forest fires, and we still hurricanes, major storms, crop destruction, and car accidents, and we consider that normal life. Why? Because we are used to it and we can plan for it.

So, we close down the states, and that closes down America. A very impressive stop to almost everything. No travel, no going to dinner at your favorite restaurant, no doctor visits, not going to the store for personal items, groceries, or anything. We are told to wear masks, we rarely use cash, we have to be contact free, we are told to stay at least six feet apart, and if you get infected, you could die. We just can’t plan for it because we do not know enough about it. Learn what you can and live life.

The impact of this virus is clear—it has touched everyone, but much is yet unknown. How long will it continue? When do we stop transmitting? When do we get a vaccine or a treatment? Are we Americans so hard-headed that we cannot face the facts about how this virus spreads and the fact that it kills our family members? I will agree that the overall numbers are very low, in general, but still, more than 180,000 of our friends and family have died. The US population is estimated at 331,000,000 people. Nearly 6 million have been infected, or about 1.81% of the population, and 180,000 have died from the virus, or about .0005% of the population. Is this really something we should be worried about? Concerned about?

What happens next? We all start working from home. Commerce begins to fade, and the fall of Rome has to be next. We are Americans, and we are consumers. Our spending habits have changed from going to the store to online ordering, ecommerce. From what I have seen and experienced with family and friends is that the isolation is almost as impactful as the virus. The isolation creates a depression, a fear of the unknown. As humans, we need contact for a variety of reasons. I like to laugh, others want to validate, others compare everything, and others are measuring their existence against you. We believe everything because we have the news on 24 hours a day, and the news is telling us how it is spreading, how it is spiking, and how people are dying. I call it forced conditioning. Think about how you train a young puppy or raise your children when they are small. Repetitive reinforcement. Use your brain and protect yourself. Make them prove everything they say. Keep smiling, call your friends and family, and be a part of someone’s life. Have faith!

Predictions (they all vary in time from March to August)

Yelp predicts that 60% of all restaurants will close permanently, 48% of all retail will close permanently, 36% of all beauty and spas will close permanently, 45% of all bars and nightlife will close permanently, and about 40% of all fitness-related business will close permanently. The CEO of Open Table predicted that 25% of all eateries will never reopen.

Black-owned businesses apparently have suffered the greatest loss. Approximately 640,000 of the 1.1 million businesses have closed and will not reopen.

Disruptions to business are not new, and there are all sorts of disruptions. The McKinsey Global Institute found that any type of disruption in business caused a loss of at least a minimum of six months of profits.

Bankruptcies are predicted to increase by 36% from 2019.

58% of all small business owners are worried about permanently closing.

They predict that the US commercial real estate market collects about $1.2 trillion of rent per year.

They predict the multifamily sector to continue to do well, with rent collections in excess of 90%. However, Class C apartments will suffer the most, with only 54% of rents being collected. Class C apartments account for 35% of the US rental market.

They predict that the biggest impact will be on the office market. The average worker in an office uses between 125–225 square feet. Assume that there are 30 million office workers in the US today, about 20% of the total employees. There is approximately 4 billion square feet of office space. What if 20% is never again needed because they are now working from home using Zoom, Microsoft Teams, or other online, and often Constant Contact? That 20% or 800,000 square feet at $30.00 rent equates to $24 billion in loss rents. If the number increases to 50% the loss of rents could climb to $60 billion. The office market could represent 2–5% of loss to the total income from commercial real estate in the US.

They predict the retail market will continue to lose ground and see increased vacancies. Moody’s predicts that the retail market will see a loss of over 11% in rents. Moody’s has a COVID-19 dashboard for many of the markets in the US.

They predict that over 500 of the almost 1,800 enclosed malls are in imminent danger of closing. The retail malls have continued to experience problems and are at lowest occupancy in over a decade. Today the malls are experiencing little or no traffic. Many of the major retailers are closing a substantial number of stores or filing bankruptcy. Recently, a major mall was transitioned from retail to an ecommerce center for Amazon.

These are some of the companies that have announced closings and restructurings this year:

• Modell’s Sporting Goods: Founded in 1889, the company plans to liquidate its 134 stores.
• RTW Retailwinds: The owner of the women’s apparel chain New York & Co. along with the Fashion to Figure and Happy Nature brands plans to close many or all of its stores and sell its ecommerce unit.
• Lucky Brand: The company will close about a dozen stores and plans to sell itself for $140 million.
• Brooks Brothers: In business for over 200 years, the oldest men’s clothing store in the United States plans to permanently close 51 locations and is actively searching for a buyer.
• Muji USA: The US subsidiary of the Japanese-based retailer that sells minimalist home goods and apparel will trim its physical footprint and promote online sales.
• Crew: The company filed for bankruptcy with more than $1.7 billion in debt.
• GNC: Operating since 1935, the health product retailer plans to close up to 1,200 stores and to reorganize under lender ownership or sell itself to its largest shareholder.
• Pier 1: The homeware retailer announced plans in May to liquidate all 450 of its remaining stores.
• Sur La Table: The kitchenware retailer announced plans to close 51 stores with an acquisition bid from a private equity firm.
• True Religion: The company closed 87 locations before the pandemic, and this year’s bankruptcy is its second since 2017.
• Neiman Marcus: With $4 billion in debt, up to 29 of the company’s 57 stores could close.
• Art Van Furniture: All of the company’s stores were closed with liquidation sales announced in March, putting 3,000 workers suddenly out of a job.

The industrial sector continues to move forward and maintains ground. There has been a significant increase in cooler and freezer space due to the increased need for groceries and prepared food. If you stay at home, you eat more, and you store more. Those companies that provide for you must be ready to deliver.

Government influence

The government stepped in and stopped foreclosures, evictions, and business as we knew it.

They provided stimulus checks to everyone but those reading this article, changed the IRS filing date, and provided all businesses with a cash-for-people loan (employees) and said they would forgive it.

Approximately 25% of the small companies received a loan from the government. The new question will be how and when do all the unemployed get rehired?

The bigger question that should concern all of us is our national debt. When and how do we as a nation repay the trillions of dollars we just committed for the stimulus packages? The national debt as of September 1, 2019, was approximately $22.5 trillion, and as of May 1, 2020, the balance was $26 trillion.  Any additional stimulus packages? There will be a reckoning! How does a nation pay back its debt? Do we print money, sell bonds, or default? Reduce the value of the dollar? Enjoy inflation with no buying power? Do we address the issue earnestly, or do we leave it for our children and grandchildren? This is a much bigger problem than COVID-19 will ever be!!

So, where do we go from here? When do we go back to normal?

Think of it this way: as far as COVID-19 is concerned, the worst is behind us, and the future is in front of us, and I am betting on the future. Some of the experts are predicting up to a year or by the end of the 2021 before things look close to what we had and expect for our economy. Have faith, and do your part.

Where are the opportunities?

How do we buy vacant retail centers, office buildings, change the use from A to B, and provide the product to the consumer when needed and at a fair price? I believe that option agreements, of some form, will become important again.

What about the college or institution that is seeing a reduction in students, creating a reduction in income? Will they create ground leases on specific buildings to raise cash to cover the negative cashflows while protecting their cash reserves? Will they have the right to buy the property back, thereby creating new annuities?

I listened to a news report on Bloomberg that had an interview with a capital company that had outlined a deal it is working on with an airline company. The plan is to buy 10+/- planes for $150 million. They basically structured a triple-net lease at 15–16%. The company did not give the remaining parameters, but this is just another of how companies are providing benefits for a need.

How do the new currencies like bitcoin come into play? When do we go to a currency-free economy?

Perhaps if you are reading this and have other ideas on how best to look for or benefit from other types of opportunities, you could send your ideas through the S.E.C. Observer comments field, and together we can all benefit.

Change is not always good or accepted, and it is rarely predicted correctly. As a note, the ice-harvesters never invested in the ice factories, and the ice factories all failed due to the lack of foresight, planning, and predicting thanks to the invention of the at-home icemaker. We are the problem solvers of the real estate world, and collectively we should begin to plan and strategize on how we turn lemons in to lemonade.

Take it all in stride and protect yourself, keep smiling, keep the faith, and remember that this too shall pass. GO HUG SOMEONE!