30 Oct

As much as we don’t want to believe it, Covid-19 has affected us in more ways than we could have imagined.

This has altered our perception as investors and saw things in a new light and perspective in terms of buying and selling investment especially in real estate.

Nobody thought that even real estate would be affected by this pandemic. But there’s no point in crying over spilled milk. What is important is that we should look forward to minimizing the effect of any other pandemic to investments in the future.

In this article, we will look at factors that can have a critical impact on real estate properties regardless if there’s a pandemic or not.

As unique as Covid-19 is after we have overcome this pandemic, we will have a more thorough understanding of the importance of investing wisely, and more so, for a more protected future.

Other Assessment of the Matter

Overall, our view is that the most common forecasts are understated for several reasons.  First, the pandemic is more widespread than prior market downturns.  Second, a greater recovery period is expected to be required due to staggering unemployment – the need for companies in a “new economy” to understand how to operate their business.  Finally, there are other factors that may be unique to Covid-19 that are outlined in the following section, that are not noted elsewhere.

Closely tied to “value sustainability” forecasts are new underwriting challenges. Several are noted as follows:

  • Financial pain must and will be allowed to occur this time as compared to the “Great Recession”. Prior bailouts did not fully “re-set” market values to true value/cost. Such government actions must be carefully targeted and driven by long-term benefits.

The most obvious choices here are re-building an improved (digital) manufacturing/industrial sector, along with material infrastructure upgrades. A 21st-century economy cannot function properly with a 19th-century infrastructure. This biases real estate value to suffering larger value re-sets as a result of Covid-19.

    • The concern must be expressed about the following as it relates to unprecedented Federal “bailouts”:
  • Many of these “loans” are unlikely to be repaid. Thus, they are simply “grants” which is very different from past “loans” (which were eventually repaid). This is a MAJOR capital creation (eventual inflation) risk. It will mandate that interest rates remain at nominal levels for a long time.

    • Nearly all such “bailout” funds are going to be allocated to payroll or operations, thereby adversely and severely impacting the “research and development” investment. Further, near-term, companies themselves will have more limited “R+D” funds as they recover. This has long-term, adverse impacts on the macro US economy, especially from an international viewpoint.
  • Will there be “forbearance” across the board? Yes. Will it be easy? No. In fact, it will be harder than in the past, as entire industries will have to be re-analyzed not to mention “re-structured”. Past market crashes have had a more limited impact on the economy at large.

More specifically, such crashes were heavily focused on real property issues. This pandemic has adversely impacted nearly every industry, in a material way. Again, this biases recovery to a longer period, and individual property value losses to a greater level.

  • The current pandemic has shed a glaring light on any number of systemic problems within all aspects of the US economy that will need to be re-underwritten and changed moving forward to reflect a “digital (21st century) economy” versus an “analog” (20th century) economy”.

Prior solutions to prior crashes - may not apply here. Simple examples here include:

    • The health care system will need to be (entirely?) re-vamped (finally?).
    • The various distribution systems will be re-examined.
    • Use of space, by sector, will require physical re-design and will re-structure all real estate costs.
    • Education delivery will need to be altered; etc.
  • As an industry, real estate will have to look very hard at property designAll uses will require a re-design, and the cost of retrofitting all uses to the new paradigm will be material in terms of either cost or time. Again, this biases asset values down for functional space reasons.
  • Overarching all these points is the need for a new regulatory structure. Similar to infrastructure, this old paradigm needs an upgrade, with a greater focus on all industries’ fundamentals and speed to market. Moving forward, such changes will be required, as follows:

    • Zoning must, universally, be more flexible/much faster to adjust to faster/shorter property life cycles. More specifically, “form-based” codes, where interior uses can vary, will become more important than “use-based” codes.  This is needed to keep properties fully occupied for the greatest duration, and to prevent “zombie (substantially vacant) assets”.
    • If government bailouts are now occurring more frequently, then more stringent reporting requirements (accountability) by recipients are needed to ensure that tax dollars are being spent wisely.
    • “Public health factors” will now have to be designed into all new projects. This may change the supply/demand ratios for mixed-use projects; high-density properties; common areas; and even SF/employee requirements.
    • Global trade/regulations will become an even more important factor, if for no other reason than national security - and pandemic protection.
    • Oligopoly industries will need to be re-structured to minimize future “concentration risk” and, hence, major bailouts.
  • As noted in this paper, on how properties are underwritten (valued) moving forward, more accuracy will be required as follows:
    • Single point valuation, as of a specific date, is no longer viable/valuable. Thus, any number of value scenarios must be reported.
    • “Value sustainability” and superior underwriting requirements will be needed to protect the most capital intensive of all industries. New projects/investments will have to be underwritten with automatic, built-in stabilizers moving forward.

As an example, in the event that forecast revenues are not achieved, automatic capital calls will be required by the debt side to be put in escrow accounts. This is similar in concept to “pre-packaged bankruptcy” provisions created following prior market corrections. This keeps everyone focused on operating execution, and minimizes risk to a project and the economy.

    • Given the shorter “economic life” of all real estate properties today, H&BU analysis must be required in all cases….for the next “turn” (next five-10 years)…or the following “turn” (years 10-20) that underwriting has a more formal, better-defined exit strategy.  Loan terms need to be written around such analysis.

How long will it take to recover?

In the author’s view, a full five-to-seven-year period of recovery will be needed as this pandemic is so widespread, and impacts 100% of the economy, as compared to prior market crashes which were more narrowly focused or temporary. A longer period will be expected if there is another “extend and pretend” plan, or unemployment does not rebound quickly on a par with prior recoveries.

Other than some levels of regulatory relief, the US economy will be restructured in many ways post-pandemic that have nothing to do with pre-pandemic events. This will take time; and economic pain will have to be endured and studied, with on-going corrections made.  Now is the time to undertake all these actions.

Investors across the economy need to plan for this time period, think through how to completely re-position their business or industry so that future pandemics (yes, there will be others) are less destructive than the current one is. Wise investors must plan for this much longer “recovery period” than has been reported.


As investors, the wisest thing we can do it to make our plans futureproof. We know that investments are for the future, but now that we’ve seen that there are still natural and unexpected factors that can come suddenly into play, we still have to be wiser and better at creating opportunities and investments.

This proved to be a challenge, a welcome one at that because, at the end of it all, we have emerged stronger, better, and wiser. Proof that even with any type of situation, we can still adapt and create opportunities even after being dealt with a bad hand.

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