From a small northwestern observatory…

All of us in real estate know that some commercial property and investment sectors have been hit pretty hard. Our ACCRE fund-of-funds avoided those sectors (several of those were already over-valued before Covid hit) and has held its own, and continues to perform well against its benchmarks. Note, of course, that ACCRE is a carefully curated fund, and we’ve continued to monitor the portfolio.

Conversely, offices, hospitality, and retail are really at a cross-roads. A lot of equity had disappeared from those sectors and from funds which were heavily weighted in those sectors. However, are the fundamentals sound? That is, are we looking at cyclical downturns or are we going to be left with a lot of marginally worthless property when this all ends?

One signal – and it’s not at all a perfect one — comes to us from the Exchange Traded Funds (ETF) sector. Specifically, I’m looking at the iShares CMBS ETF, which purports to invest in high-grade commercial mortgage backed securities. This fund has had a very real bull market tear since late 2018, in no small part due to a solid yield in the face of an inverting bond curve. Since late 2019, it’s been extraordinarily volatile, and indeed its 50-day moving average has cycled twice in the last 3 quarters. However, for the past month or so, it’s been solidly up. This does not suggest that traders and investors think that the coast is clear for commercial real estate — far from it. However, it does suggest that the market thinks there is enough equity underpinning these loans to continue making mortgage payments.

Graphic courtesy iShares, as of mid-day, 6/26/20

Now, this all needs to be taken with several grains of salt. For one, the market as a whole has regularly proven itself fickle, if not outright wrong, several times in the past few months. Second, going into the last recession, Residential Mortgage Backed Securities (RMBS) were doing just fine until… well… they weren’t. However, this is a useful and potentially important data point that shouldn’t be missed by savvy investors.

On the other hand, what do we do with securities when markets peak?

… in an article by Geoff Williams in U.S. News and World Report.

https://money.usnews.com/money/personal-finance/spending/articles/smart-ways-to-spend-1000

Of course, the interview was a but longer, and I noted that the thing that might be the best for the individual (socking the money away in the bank for an even rainy-er day than now!) might not be the best for the economy as a whole. If you really want to use “stimulus” money to stimulate the economy, then it needs to be spent, locally, on job-creating things. Money spent in that fashion quickly multiplies thru the economy. The local barber spends money to get his kid’s teeth fixed at the dentist, and then she uses that money to shop at the local car repair mechanic, who in turn buys from the local farmer’s market.

Best wishes, everyone, and stay safe!

Now I read, today, that Tailored Brands (TLRD) is meeting with bankruptcy consultants. If you’re not familiar with them, you may be more familiar with the stores they run: Men’s Wearhouse, Jos. A. Banks, and K&G. They’ve been strong players in the clothing biz for quite a few years, and while bankruptcy doesn’t necessarily mean going out of biz entirely, at the least it will mean some painful restructuring of complex webs of contracts, debt, and banking relationships. My interest is in the real estate side.

Real estate usage changes over time. We think of these changes as slow, but in fact they can come fast and furious. For example, the 1920’s was a decade of explosive growth in the “built environment”, and many of the downtown city street facades date to this period. The depression put a halt to the 20’s growth, only to see suburbs explode after WW-2. The baby boom gave rise to shopping centers, neighborhoods anchored by elementary schools, and commuting on superhighways. Even though the “great recession” of 2009-10 was centered on real estate imploding, we really didn’t see a seminal change in the way people live and work. Home ownership went from about 69% to it’s historic, post-WW-2 level of about 64%. Shopping malls hung on for dear life, and the continued construction of big-boxes was unabated. If anything, real estate experts sat around wondering when, if ever, the Amazon phenomenon would catch up with brick-and-mortar stores. To an extent, the continued prosperity after 2010 put pause to any major changes.

Now, I’ll drop the other shoe. This year marks the fiftieth anniversary of Alvin Toffler’s Future Shock. Yeah. I know. If there is one resounding theme in Toffler’s work, it is that in the future, change will come at an increasingly fast pace. Hence, it should come as no surprise that the first six months of 2020 seem like a decade. So, with that in mind, a few observations…

First, the resurgence of downtowns in prosperous cities (Seattle comes to mind) assumed that people were willing to suffer with small residences (usually apartments or condos) in trade for a vibrant social scene on the streets and in restaurants, bars, entertainment facilities, and such. Last week, the AMC Theater chain announced that they probably could not survive the Corona Virus Pandemic. A significant number of people — not everyone, but a lot — will opt out of the social scene. I’m not suggesting we will become a nation or world of hermits, but three things are coming together to hit the reset button on this utilization model: a long time for people to “catch up” on discretionary spending after this nasty recession, a heightened sense of the risk of lending or providing credit to restaurants and bars, and an overall reluctance to rub elbows, at least by some folks.

Second, it’s not just retail, but it’s all the other stuff that supports brick-and-mortar retail. Every time you buy a pair of socks at Jos. A. Banks (and yes, they have very nice socks), someone had to deliver those from a warehouse. Now, of course, you are at least marginally likely to buy those socks from Amazon, and yes, they have warehouses, too. However, Amazon and their network of small businesses tend to be a bit more efficient than most brick-and-mortar retailers, and as such need less space and fewer people. Further, until the aftermath of this recession is over, it’s a simple fact that people will buy fewer socks, and fewer Ford F-150s, and fewer Weber gas grills. Not withstanding my previous jokes about Captain Morgan sales, reports have it that distilled spirit sales in America have been hit so badly as to endanger many famous liquor brands. Add to this the fact that “necessities” (e.g. — groceries, health care) are skyrocketing in cost, and you can quickly see that merchants focused on discretionary goods may have problems.

Owner occupied housing is nearly at a standstill. Real estate “listing” agents are having to be terrifically clever to sell homes. A lot of sales come from transfers, and there is little of that happening this summer. People are hunkering down, taking down the for-sale signs, and trying to keep their powder dry. By the same token, home builders, who have never fully recovered from the past recession (a story for another day) are now sitting on inventory they can’t sell. It’s not nearly as bad as 2008/9, but it’s not good, either.

A lot of construction happens by governments, both for new buildings and for public infrastructure. You can imagine that the brakes have been hit solidly on that. Transportation projects, which are often dependent on fuel or transportation taxes, are probably hitting the skids right about now.

There are some bright spots. Working from home demands a lot more bandwidth. Connectivity providers are doing what they can. If this trend continues, we’ll also see a marked demand for more cloud storage, which despite the name actually happens in places that look like warehouses full of computers.

Finally, and this is not entirely obvious, but existing rental units with tenants will do just fine, but new rental units will see longer periods to rent-up and get to stabilized levels. Why? Mainly because there will be less moving around and greater tendency for increased tenure in rental units. Existing landlords will increasingly cut deals to keep tenants in place, while new, vacant spots will have trouble competing for those tenants. In the residential rental space, this will be ameliorated a bit by the noted probable decline in home ownership. In the commercial space, even for industries that are doing fine, there will be difficulty competing for new tenants.

So there’s that. Some random thoughts for a Sunday afternoon. Y’all stay safe out there, and I look forward to hearing from you.

All of us at Greenfield Advisors hope all of you are staying as safe as possible as we continue thru this Covid pandemic!

As noted last month, ACCRE continues to perform well, having recaptured most of the bear impacts. None-the-less, we made some portfolio adjustments in late May to drop a few laggards and add a few positions we felt would serve well going forward this year.

As you probably know, the S&P 500 had a great month, but still lags behind ACCRE both lifetime returns as well as performance since the Feb-March bear slump. The overall S&P Global Property Index is just back to level territory, and had a dismal May.

We’ll be back mid-month with some portfolio metrics. Stay safe out there!