This is from my long-time friend Chris Gragtmans, world-class whitewater kayaker and rising star in the commercial real estate world. The following analysis mirrors my thoughts precisely on the dangers and opportunities ahead for real estate investing in WNC and elsewhere.
What Every Real Estate Investor Must Know | Western NC
Author: Chris Gragtmans, Commercial Broker and Advisor
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Life and business has permanently changed in the last two weeks.
As the coronavirus has swept the US hospitals, groceries stores, stock market, and real estate markets, now is the time to shore up our health, financial, and real estate fortresses to weather an extended storm.
We feel compelled to provide a concise summary of what we know at this point and best practices for the weeks and months ahead. While the health and safety of our families, friends, and clients is paramount, we acknowledge that anytime there is turmoil, there is also opportunity. Although news is changing hourly, the following is what every real estate investor should know at this point.
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Macro-Economic Perspective
After 12 years of bull market and extremely high consumer confidence, Wall Street fell off a cliff, and the major indices have corrected by over 30%. The virtual shutdown of the entire US economy has had particularly damaging impact on hourly wage earners, small business owners, food service, retail, hospitality, and the airline industry. A bear market and recession is already underway, and unemployment projections are grim… some topping 20% (height of 2008 recession was 9.5%; height of Great Depression was 24.5%). Fortunately, the fiscal and monetary cannons of the global and US economies have fired harder and faster than anytime in history. The Fed has cut the 10 Year Treasury rate to near zero and has been pumping billions into liquidity and the economy. Fannie and Freddie are ordering lenders to work with borrowers who are impacted by the crisis in an attempt to mitigate foreclosures and evictions (pertinent to 50% of all US home loans). A stimulus bill of $2,000,000,000,000 (the largest in history) was passed during the evening hours of March 25th. Federal income tax filing and payment deadlines have been extended. We are entering a telling time for how well Americans have saved for a “rainy day” and how much consumer debt they carry.
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Macro Real Estate Perspective
As a general rule, real estate tends to lag the stock market by six months, but in this case certain sectors have been hit extremely hard. Hospitality, retail, food service, senior housing, and student housing revenues have all fallen through the floor. Healthcare, industrial, grocery-anchored shopping, multi-family, and single family have thus far been sheltered, but no doubt every real estate asset class will be affected as the financial distress cascades through the chain. Corporate bond spreads have widened considerably, a historical indicator for commercial real estate lending. 50% of the commercial real estate lending community is still active, but many are on the sidelines as underwriters wrap their heads around valuation and risk mitigation in the evolving landscape.
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Micro Real Estate Perspective
The Asheville and WNC real estate markets are largely supported by tourism, which has been heavily impacted. Retail and food service tenants have been engaging landlords to collaborate on rent abatement or reduction measures. Our healthcare institutions and providers, including the recently acquired Mission Health System, are bracing for an onslaught of coronavirus patients. Hotels and AirBnB units are down considerably, and vacation rental owners may be compelled to reposition units. This could lead to higher supply in long term housing stock, which would put downward pressure on rents and improve the regional affordable housing problem. Single family residential real estate showings and transactions are continuing with revised health-conscious considerations, and valuations haven’t yet adjusted to the systemic shock. Low cost of capital is still pushing many deals over the finish line. Our team has been busy over the past few weeks fielding high interest in Western North Carolina real estate. A lag in market activity is certainly on the horizon.
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Take-Aways
A few key real estate discoveries are apparent at this point:
-This crisis has accelerated technological innovation in terms of grocery delivery and remote work. This will permanently shift and consolidate retail and office, and create opportunity for enterprises that facilitate remote communication.
-Healthcare and medical office buildings remain an attractive investment vehicle.
-The Federal and State governments are collaborating to soften the fall for as many people as possible, but as with any welfare program, there are those who will attempt to work the system. We anticipate tough conversations ahead for landlords of all types.
-Retail was already on the ropes due to the Amazon effect, and is even more exposed now. Commercial mortgage backed securities with heavy positions in retail and shopping malls are in trouble.
-China has recovered quickly and decisively after taking extreme measures to contain the virus, and their manufacturing, retail, and hotels are roaring back.
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Strategies
No doubt this is a challenging time, but here a few productive measures you can take as a real estate investor:
-Panic is not a strategy. Breathe, turn off the TV, and take a realistic look at your own financial position.
-Play good defense now so that you can play good offense when the time is right.
-Reduce all unnecessary business and personal expenses.
-Refinance Debt. With historically low interest rates, it’s likely that you may be able to lower your home, investment property, or vehicle payments. Note- be conservative about your LTV so you can withstand downward rent pressure!
-Initiate lines of credit. Now is a great time to create access to capital like a Home Equity Line of Credit (HELOC) or business line of credit. Credit tends to tighten during recessionary periods.
-Be proactive with your tenants and lenders. Look at everything on a case-by-case basis. Acting with candor and compassion in a collaborative spirit will set the foundation for great relationships moving forward.
-Build cash reserves. There will be tremendous opportunity in real estate as this situation develops.
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No doubt the healthcare, business, and real estate worlds have been permanently changed by the coronavirus. This is a cruel, but unifying event, and and we continue to send positive energy out to our leaders to rise above self-interest in responding to this crisis, to all those who may be immuno-compromised, to our valiant healthcare workers, and to those who may have sick or lost loved ones.
We’re all in this together. Please consider our teams at Altamont Property Group and Keller Williams Commercial to be available to you now and at any time to help in any way possible to lift stress and anxiety off of your shoulders.
With love and gratitude,