Ep 39: Coronavirus and Real Estate with John and Chris
People bring up bird flu and swine flu but the reality is that there has not been a situation with the potential to have such dramatic effects on real estate as the coronavirus for the last 20 years. There is no doubt that the coming period is going to be an extremely fluid situation, with all the moving pieces in the business acting and interacting out of fear, opportunism, and innovation. Accordingly, Chris and John took this episode to share some of their thoughts about what the real estate game could start to look like in the next few days, months, and years. They opened up to their partners and investors to tap into some predominant concerns and this conversation gets segmented into a back and forth between our hosts in response to each topic.
They kick things off with a consideration of the rent question, considering whether unemployment will rise that much and whether tenants who can pay will take advantage of the situation. Listeners will also hear some of John and Chris’s strategies for helping tenants keep leases through the coming months. The topic then shifts to market trajectories, ideas of how long the slump might last, whether it’s the reset button everybody has been waiting for, and the idea that while things will be unpredictable for a while, they’ll probably just go back to normal in a few months.
In any event, investors might have to take a reality check and go back to those 12% IRRs which at the end of the day are still very reasonable. John and Chris wind things down with a few of their short and long-term strategies for underwriting deals, and we hear about things like focusing on bad debt, reserves, stress testing, and cap-ex, and the resurfacing of the submarket. The main takeaway from today’s show is the confidence our hosts have in the temporariness of this situation as well as the resilience of real estate to it, so plug in and get the details from them.
Key Points From This Episode:
Real estate precautions made according to the CDC: virtual tours, cutting maintenance, etc.
A question on all investor/owners’ minds: will people be paying rents this month?
Different properties John and Chris have and location-relative stresses those might take.
A 30% unemployment worst-case scenario meaning the balance should still pay rents.
Reasons why those who can pay rent will: relief payments and reluctancy to get into credit.
The tendency for B and C class tenants to take advantage of the situation by not paying rent.
Creative ways our hosts are helping tenants in threatened industries keep their leases.
The fluidity of the situation: how all parties will suffer: banks, lenders, tenants, and more.
Confidence in the idea that long-term real estate is a better investment than stocks right now.
The idea that this is a big halt but things will definitely go back to normal after a few months.
Hints at a bright future for real estate: social trajectories that won’t stop due to coronavirus.
Reasons why people might see this as a time to buy as well as sell: fear and opportunism.
A sobering in expectations for IRR leading to people accepting more reasonable ones.
The connection between social media information overload and forgetting crises quickly.
A positive effect the virus will have in implementing technology, thus evolving operations.
Which bills people will tend to pay first and which companies will suffer due to that.
A reminder to check with the bank and other parties to see relief programs exist.
Short-term strategies for underwriting new deals: focus more on the bad debt.
Long-term concerns for underwriting: look at submarkets.
A definite strategy for both situations: jacking up below-the-line cap-ex.
The three biggest things to think about if buying now: reserves, stress testing, and cap-ex.
“Do I think we’re in the great depression? No, that’s crazy. Do I think that tenants are going to take advantage of the situation? Of course.” — @johnc429 [0:08:24]
“This is probably a few months. Maybe it’s two, maybe it’s six.” — @ChrisGrenzig [0:13:13]
“I do think this is the domino. You know, we have been on a bull market run for 11 plus years. It’s sort of how the coronavirus is spreading, right? It’s been exponential growth for 11 years. So I do believe that this is the domino to wake people up.” — @johnc429 [0:16:40]
“I think people’s memories are significantly shorter than 24 months and I think there is going to be a lot of people – it’s already started – reaching out and having conversations of, ‘What are you buying?’” — @ChrisGrenzig [0:19:34]
Links Mentioned in Today’s Episode:
John Cohen on LinkedIn — https://www.linkedin.com/in/john-cohen-56847314/
John Cohen on Twitter — https://twitter.com/johnc429
Chris Grenzig on LinkedIn — https://www.linkedin.com/in/chris-grenzig/
Chris Grenzig on Twitter — https://twitter.com/CGrenzig
Chris Jackson — sharplineequity.com/chris-jackson
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