As we all know there is a virus by the name of Covid-19 or Coronavirus that has infected over 200,000 people in 140 countries around the world as of today. The stock market is unstable dropping 2000 points one day and jumping 2000 the next. How will all this affect the real estate market and in particular apartment buildings? The answer is I don't know, but based on what I see there are some things that could happen. It will all depend on how long it takes to contain the virus and stop its spread. I will share my thoughts for the short and medium term. Additionally, I will share what we are doing to make sure our investments can sustain themselves through this crisis.
If the virus is contained Globally within the next 30 days we would be able to say we got lucky. Despite early containment the world economy would have taken a beating. The worlds leading exporter China has already decreased overseas shipments by 17.2% according to Reuters. Other top exporters such as the USA, Germany, Italy, Korea and Japan have all been subject to the pandemic and thus a slowdown in economic activity. We can expect it will take time for countries to ramp up to previous production levels once the virus is contained. The good news is we may be able to get by without a recession in this case. There are different definitions of recessions, but the one I am using is two successive quarters with a decline in Economic Activity or Gross Domestic Product.
If it takes between one and three months to contain the virus globally we can expect to go into a recession. How bad of a recession will depend on viruses impact and monetary and fiscal policy. Monetary policy is already hard at work. Jerome Powell Chairman of the federal reserve has authorized two interest rate cuts in two weeks. A 1.5% rate cut on March 3rd and another 1% rate cut on March 15th bringing the fed funds rate close to zero. This is the overnight lending rate banks use to lend to each other, but will also influence and push down long term interest rates for consumers and businesses. Additionally, the federal reserve is coordinating with central banks around the world to pump additional liquidity into the economy. They are doing this for several reasons. One, keep consumer and business sentiment up. Two, help businesses stay afloat through this tough period so they don't have to do mass layoffs or shut their doors. Lastly, to prevent a deeper recession. Fiscal policy would be congress passing legislation to help consumers and businesses weather the storm. This type of legislation also called fiscal stimulus would include money going directly to businesses and consumers through checks, loans, investments, etc. Currently there are a couple of plans going through congress one is a $850 billion dollar economic plan encompassing a number of items.
What are we doing to protect investments and investor capital during this time? A few things. One, the key to weathering these types of storms is liquidity or in other words cash. We are in a good position with our properties as we typically keep several months of expenses in reserve in addition to normal reserves. Two, we are delaying capital expenses at our properties unless they are absolutely necessary. Three, we are pausing rent increases until we see the economy starting to bounce back. When necessary we will consider doing rent reductions or concessions to keep units occupied. Lastly, distributions will continue for the time being with, but will be evaluated depending on market conditions.
Although this could be a great time to purchase real estate. All acquisitions must be strategic and smart. We will continue to be extra conservative in our analysis and make sure all purchases pass extensive sensitivity tests including being unstabilized for a period of time. Because we specialize in B and C apartments we believe we are in a good position even if we hit a recession. Residents typically renting Class A or B apartments move down to B or C apartments when their income drops.
We do hope this is blows over in the next few weeks, but as the saying goes "plan for the worst and hope for the best". This is not a time to panic, but to be prepared. Follow guidelines from experts form the Centers for Disease Control including washing your hands, limiting large gatherings and unnecessary travel. Stay informed, but don't watch the news too much either as they sometimes add more stress to an already stressful situation. We have been through worst events as a country and society. I believe it will be challenging, but we will surpass this one too. Stay healthy and safe.
Denny Troncoso, MSRE
CEO - Coso Capital Group
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