A Shock of a Different Color: Spencer Levy on an Economy in Crisis and the Impact of COVID-19 on our Business

April 10, 2020
Written by: Elizabeth Krol, CREW Boston

Compared to previous economic crises, “this is a shock of a different color.”

On March 20, 2020, Spencer Levy, chairman of Americas research and senior economic advisor with CBRE, led a CREW Network Virtual Conversation Corner (member login required) to share his perspective on the impact of COVID-19 on our economy and industry. In response to the rapid escalation of the pandemic in the first two weeks of March, CREW Network mobilized to host this members-only session to provide business intelligence to guide our company and clients through these uncertain times.

Levy opened with an overview of how the COVID-19 pandemic has already impacted the global macroeconomic scene and what we can expect over the near-term.

“The big picture is well-known. There has been a tremendous slowdown from a macroeconomic standpoint globally. It’s going to lead to a very, very negative second quarter, including tremendous job loss. Regrettably, many of those jobs lost will be in, or related to, commercial real estate.”

Another immediate reaction to COVID-19 has been a “material falloff in new deals being brought to market, as well as material falloff in the number of bidders and lenders pulling out of the market.” The good news, Levy observed, is that re-pricings, otherwise known as “re-trades,” are being actively negotiated.

“In the end, we’ll see repricing, but it won’t be as massive as you might expect,” he said. “About 10-20 percent of deals will get price reductions. Some deals will die, others will be extended. The winners will be the stabilized assets with good tenants, especially in the areas of office, multifamily and industrial. Those most impacted will be retail and hotel properties, who may benefit from short-term repricing.”

Spencer Levy

CBRE chairman of Americas research and senior economic advisor Spencer Levy leads the first CREW Network Virtual Conversation Corner via Zoom. 

CBRE is actively monitoring impacts by asset class, and Levy shared the following highlights:

  1. The immediate impact of COVID-19 is being felt in the hotel sector. Levy is optimistic that the swift action by the federal government to deliver a bailout that includes some mortgage or rent relief will soften the blow.
  2. Retail is another hard-hit sector, but it’s a mixed bag. Major mall owners, such as Simon Property Group, quickly shuttered their malls. Retailers selling non-essential goods are closing their retail locations for the short-term, and restaurant space is almost completely shut down. One silver lining lies with any retail properties that are grocery--or pharmacy-anchored, which have seen remarkable levels of demand.
  3. Levy is still optimistic about industrial space. Despite a fall-off in net absorption, particularly warehouses and ports that are experiencing materially disrupted supply chains, there has been no decline in last mile logistics centers. Given the deep and liquid capital in this sector, industrial is expected to “weather the storm well.”
  4. Multifamily is an area of significant impact, especially in cities like Boston, that have halted construction. Levy views the April 1 rent-due date as critical and advises any owners/landlords to “start the conversations now with your tenants.”
  5. The office sector will face the same issues with tenants, and Levy recommends that tenants and landlords also engage in conversations as soon as possible.

Citing two comparable crises (i.e., SARS in 2003, and the “corona crisis” right now in China), Levy expects we will see a shift back to the U.S. “opening doors” again by April 30 and begin the process of economic recovery. CBRE is predicting a 6 percent 2nd quarter decline in GDP (JP Morgan’s 14 percent drop is the most pessimistic), a bounce back in the 3rd quarter, 6-8 percent growth in the 4th quarter, and approximately 4 percent growth next year. Much of the forecast is based on the expected positive impact of the swift, unprecedented fiscal stimulus package.

“The cash stimulus for this year will be rocket fuel for the recovery, and act as a pillow to cushion the impact on sectors like hotels and restaurants that need cash for mortgage and rent relief,” Levy said. “We’ll also see pent-up demand globally to come here to the U.S. market.”

Levy encouraged the CRE community to make rational decisions. “The GFC [Great Financial Crisis] was a financial market crisis. This is a crisis of consumer confidence which is why we’re seeing such a dramatic impact. Although there is ‘demand shock,’ banks are well capitalized. Our stock market has been roiled, but by this time next year, the markets will be back. This is ‘a shock of a different color.’”

Elizabeth Krol

Elizabeth Krol is national client manager for Partner Engineering and Science, Inc., and is both a Professional Geologist (PG) and an ASTM designated Environmental Professional (EP). She provides comprehensive, expedited transactional support services for real estate, legal and financial service companies nationwide. Krol is an active member of CREW Boston and immediate past delegate to CREW Network.

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