Silver Linings - It's bad, but not all bad
It’s very possible we will receive an order to shelter in place soon. New evidence suggests NC needs to take extreme measures between March 28 and April 4** to “flatten the curve” or we face overwhelming consequences (covidactnow.org).
I am preparing my clients and tenants for the order to be issued by Friday. There is still some question as to what parts of the real estate industry will be considered an essential service. However, we as an industry are so interconnected with others, it would be hard not to be affected materially no matter that categorization.
There are Silver Linings
It’s anyone’s best guess which way we are going, with every day bringing new changes in both the spread of COVID-19 and how our various institutions are reacting. However, some silver linings are coming to light.
Interest rates are very, very low. I recently helped a client pursue a commercial purchase and she was offered a 3.75 percent interest rate on an owner-occupied loan under $500,000. This compares with 5 percent we saw less than one year ago. I thought we were already in a period of “free money” before this crisis!
The banks are so much better capitalized today compared with the last recession that they are able to continue to extend loans without the over-tightening underwriting we saw in 2008. This means that the majority of borrowers, both commercial and residential, can take advantage of these rates.
Alternative investments, of which real estate is one, continue to look pretty good as a means of diversifying portfolios. One of my investors responded to an update I recently sent, saying he is glad to be invested in one of my development projects as he is watching the stock market tick down. This is not to say that real estate is not also risky. This development faces hurdles as well, especially in this new environment. However, real estate is a long-term play and, unlike stocks, will always have a base value. The value of land is never zero*.
A 2017 report by HSBC (The Rise of Alternatives) notes that even pension funds, which you would expect to be incredibly conservative investors, have placed up to 30% of their portfolios in alternative investments. Individual and institutional investors continue to look for returns in their portfolios and thanks to programs like 1031 exchanges and opportunity zones, real estate remains a popular option.
Which leads to another silver lining for the real estate industry: there is still a lot of capital in the market looking for investment.
The stock market is moving down due to a tremendous amount of uncertainty in how COVID-19 will impact companies’ profitability. Interestingly, investors seem to not be flying into traditional safe havens such as bonds right now, instead moving into cash. This positions investors to redeploy assets when opportunity arises.
This is likely a lesson learned from 2008, when investors with cash were able to snap up distressed properties. I now work with a few individuals who were well positioned in 2008. Trust me, you want to be them.
* In some cases, investment is in the project and not the land itself. The project value could go to zero.
Next Post - Change in the Workplace
**update - it seems social distancing is working! the covidactnow.org website now shows the NC point of no return to be April 13-18. It still forecasts that current measures are not enough so I suspect we will still see a shelter in place mandate in NC in the near future.