G7 Leaders’ Statement: “We, the Leaders of the Group of Seven, acknowledge that the COVID-19 pandemic is a human tragedy and a global health crisis, which also poses major risks for the world economy. We are committed to doing whatever is necessary to ensure a strong global response through closer cooperation and enhanced coordination of our efforts. While current challenges may require national emergency measures, we remain committed to the stability of the global economy. We express our conviction that current challenges related to the COVID-19 pandemic need a strongly coordinated international approach…” (full statement)
How Are We Doing?
There seem to be to streams of thought as you scroll through the news this month. Some have their attention solely on the health scare and safety risks during the coronavirus outbreak. On the other hand—eyes are honed in on the economic impact both nationwide and globally. Regardless of the end game severity of COVID-19, we will eventually get through this. The question is: where will we be financially? and how should we be adjusting our investment strategies—if at all?
It’s clear from the past few weeks that the virus will have a more significant near-term impact on the economy than many initially predicted. As multifamily investors, it’s important to track the current trends in order to continue to make long-term investment decisions in such a difficult time. The good news? Real estate's security and incentives appear to remain strong.
Sure there will be chaos in the coming weeks and possibly months. While we don't know what that ripple effect will look like exactly—real estate is expected to find its footing and continue to grow. A few of the reasons supporting this are reviewed below.
Effect on Real Estate Investing
What remains to be seen is the duration of turmoil we’ll see in the economy. Moody’s report estimates that growth will continue to decline 1.6% in Q1 and 2.5% in Q2 on an annualized basis as reported cases continue to spread into new metros. However, they predict things will rebound in the second half.
What about the real estate industry? The stock market is in turmoil, but the real estate is likely to draw what Marcus & Millichap call “a safe haven of superior yields to the bond market”. Commercial real estate has maintained attractive interest rates (at historic lows). Office properties have longer-term leases that are now much more downturn friendly. Multifamily investments are likely to see minimal impact assuming the impact on employment is short-term (more research on this coming soon). The Industrial, Hospitality, and Leisure market stability will likely suffer from social distancing as hours shorten, travel demand declines, travel restrictions continue, and global supply chain issues ensue. Grocery stores and similar providers continue to see increased demand as they struggle to keep shelves stocked.
Cash-out refinances have the potential to save consumers by reducing the cost of debt—providing leverage during a downturn. The 30-year fixed-rate mortgage (and the staple of FIG’s new construction fourplex model) fell to 3.36 %, and weekly applications hit an 11-year high, according to the Mortgage Bankers Association. For some, depending on their comfort level, it could be a favorable time to take advantage of these rates.
Global Economic Response
Initiating a $700B quantitative easing program—the Federal Reserve lowers benchmark rates to nearly zero in their second emergency rate cut. “The Fed announced that it would adjust a program in coordination with five other central banks (Canada, England, Japan, Switzerland, and the European Central Bank) to make U.S. dollars available at near-zero interest rates to enhance global liquidity through swap-line arrangements.” (Marcus & Millichap)
G7 leaders meet to address the virus’ effect on the economy and issue a statement to protect the following: (full statement)
Coordinate on necessary public health measures to protect people at risk from COVID-19.
Restore confidence, growth, and protect jobs.
Support global trade and investment.
Encourage science, research, and technology cooperation.
The Trump Administration seeks an $850 B stimulus package to assist state and local governments. This comes after the approval of an $8.3 B package approved in early March. A second relief bill was also approved by the House of Representatives that aids American workers by boosting unemployment benefits among other things (in review).
Mitigating the Impact
The World Health Organization-China Joint Mission reported in February that in 80% of positive cases of the coronavirus, those infected reported experiencing mild to moderate symptoms. The numbers as of this morning show 225k confirmed global cases and a little over 9k deaths (data from the CDC). In the United States, there are approximately 10,700 cases with 160 confirmed deaths.
What’s being done? The Guardian announced that somewhere around 35 companies are actively developing a vaccine. U.S. biotech firm Moderna has begun testing on humans in Seattle as of this week, and BioNTech will begin in April. It will take time, however as the spread continues to slow as people continue remote employment and social distancing—we will phase out of this.
Yes, if the nation’s economy had a Facebook relationship status right now it would be marked as “complicated” (is that still a thing?). The reality is…there are plenty of advisors, lenders, and groups that still have the ability to guide you through educated investment decisions despite the chaos. If you need help wading the current, we’d be happy to discuss and point you in the right direction. Know that we’re navigating this with you and are always here to help: fig.us/consult