{"id":2668,"date":"2020-10-05T22:20:34","date_gmt":"2020-10-05T22:20:34","guid":{"rendered":"https:\/\/enrichedrealestate.com\/blog\/?p=2668"},"modified":"2020-10-05T22:20:34","modified_gmt":"2020-10-05T22:20:34","slug":"other-macro-investment-conclusions","status":"publish","type":"post","link":"https:\/\/enrichedrealestate.com\/blog\/2020\/10\/05\/other-macro-investment-conclusions\/","title":{"rendered":"Other Macro Investment Conclusions"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">As much as we don\u2019t want to believe it, Covid-19 has affected us in more ways than we could have imagined.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Nobody thought that even real estate would be affected by this pandemic. But there\u2019s 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In this article, we will look at factors that can have a critical impact on real estate properties regardless if there\u2019s a pandemic or not.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><b>Other Assessment of the Matter<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Overall, our view is that the most common forecasts are understated for several reasons.\u00a0 First, the pandemic is more widespread than prior market downturns.\u00a0 Second, a greater recovery period is expected to be required due to staggering unemployment \u2013 the need for companies in a \u201cnew economy\u201d to understand how to operate their business.\u00a0 Finally, there are other factors that may be unique to Covid-19 that are outlined in the following section, that are not noted elsewhere.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Closely tied to \u201cvalue sustainability\u201d forecasts are <\/span><b>new underwriting challenges.<\/b><span style=\"font-weight: 400;\"> Several are noted as follows:<\/span><\/p>\n<ul>\n<li><b>Financial pain must and will be allowed <\/b><span style=\"font-weight: 400;\">to occur this time as compared to the \u201cGreat Recession\u201d. Prior bailouts did <\/span><b>not <\/b><span style=\"font-weight: 400;\">fully \u201cre-set\u201d market values to true value\/cost. Such government actions must be carefully targeted and driven by long-term benefits.<\/span><\/li>\n<\/ul>\n<p>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. <b>This biases real estate value to suffering larger value re-sets as a result of Covid-19.<\/b><br \/>\n<b><\/b><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The concern must be expressed about the following as it relates to unprecedented Federal \u201cbailouts\u201d:<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-weight: 400;\">Many of these \u201cloans\u201d are unlikely to be repaid. Thus, they are simply \u201cgrants\u201d which is very different from past \u201cloans\u201d (which were eventually repaid). This is a MAJOR capital creation (eventual inflation) risk. <\/span><b>It will mandate that interest rates remain at nominal levels for a long time.<\/b><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Nearly all such \u201cbailout\u201d funds are going to be allocated to payroll or operations, thereby adversely and severely impacting the \u201cresearch and development\u201d investment. Further, near-term, companies themselves will have more limited \u201cR+D\u201d funds as they recover. <\/span><b>This has long-term, adverse impacts on the macro US economy, especially from an international viewpoint.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">Will there be \u201cforbearance\u201d 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 \u201cre-structured\u201d. Past market crashes have had a more limited impact on the economy at large.<\/span><\/li>\n<\/ul>\n<p>More specifically, such crashes were heavily focused on real property issues. This pandemic has <b>adversely impacted nearly every industry<\/b>, in a material way. <b>Again, this biases recovery to a longer period, and individual property value losses to a greater level.<\/b><br \/>\n<b><\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The current pandemic has shed a glaring light on any number of systemic problems within <\/span><b>all<\/b><span style=\"font-weight: 400;\"> aspects of the US economy that will need to be re-underwritten and changed moving forward to reflect a \u201cdigital (21<\/span><span style=\"font-weight: 400;\">st<\/span><span style=\"font-weight: 400;\"> century) economy\u201d versus an \u201canalog\u201d (20<\/span><span style=\"font-weight: 400;\">th<\/span><span style=\"font-weight: 400;\"> century) economy\u201d.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Prior solutions to prior crashes &#8211; may not apply here. Simple examples here include:<\/span><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The health care system will need to be (entirely?) re-vamped (finally?).<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The various distribution systems will be re-examined.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Use of space, by sector, will require physical re-design and will re-structure all real estate costs.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Education delivery will need to be altered; etc.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">As an industry, real estate will have to look very hard at <\/span><b>property design<\/b><span style=\"font-weight: 400;\">. <\/span><b>All uses<\/b><span style=\"font-weight: 400;\"> 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. <\/span><b>Again, this biases asset values down for functional space reasons.<\/b><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Overarching all these points is the need for a <\/span><b>new regulatory structure<\/b><span style=\"font-weight: 400;\">. Similar to infrastructure, this old paradigm needs an upgrade, with a greater focus on all industries\u2019 fundamentals and speed to market. Moving forward, such changes will be required, as follows:<\/span><\/li>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Zoning must, universally, be more flexible\/much faster to adjust to faster\/shorter property life cycles. More specifically, \u201cform-based\u201d codes, where interior uses can vary, will become more important than \u201cuse-based\u201d codes.\u00a0 This is needed to keep properties fully occupied for the greatest duration, and to prevent \u201czombie (substantially vacant) assets\u201d.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">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.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">\u201cPublic health factors\u201d 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.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Global trade\/regulations will become an even more important factor, if for no other reason than national security &#8211; and pandemic protection.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Oligopoly industries will need to be re-structured to minimize future \u201cconcentration risk\u201d and, hence, major bailouts.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">As noted in this paper, on how properties are underwritten (valued) moving forward, more accuracy will be required as follows:<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Single point valuation, as of a specific date, is no longer viable\/valuable. Thus, any number of value scenarios must be reported.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">\u201cValue sustainability\u201d and superior underwriting requirements will be needed to protect the most capital intensive of all industries. New projects\/investments will have to be <\/span><b>underwritten with automatic, built-in stabilizers<\/b><span style=\"font-weight: 400;\"> moving forward.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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 \u201cpre-packaged bankruptcy\u201d provisions created following prior market corrections. This keeps everyone focused on operating execution, and minimizes risk to a project and the economy.<\/span><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Given the shorter \u201ceconomic life\u201d of all real estate properties today, H&amp;BU analysis must be <\/span><b>required<\/b><span style=\"font-weight: 400;\"> in all cases\u2026.for the next \u201cturn\u201d (next five-10 years)\u2026or the following \u201cturn\u201d (years 10-20) that underwriting has a more formal, better-defined exit strategy.\u00a0 Loan terms need to be written around such analysis.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><b>How long will it take to recover?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">In the author\u2019s view, a <\/span><b>full <\/b><span style=\"font-weight: 400;\">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 \u201cextend and pretend\u201d plan, or unemployment does not rebound quickly on a par with prior recoveries.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0 Now is the time to undertake all these actions.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Investors across the economy need to plan for this time period, think through how to <\/span><b>completely <\/b><span style=\"font-weight: 400;\">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 \u201crecovery period\u201d than has been reported.<\/span><\/p>\n<p><b>Conclusion<\/b><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019ve 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>As much as we don\u2019t want to believe it, Covid-19 has affected us in more&#8230;<\/p>\n","protected":false},"author":1,"featured_media":2688,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3,6,14],"tags":[],"class_list":["post-2668","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buy-sell","category-covid-19","category-real-estate"],"_links":{"self":[{"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/posts\/2668","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/comments?post=2668"}],"version-history":[{"count":0,"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/posts\/2668\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/media\/2688"}],"wp:attachment":[{"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/media?parent=2668"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/categories?post=2668"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enrichedrealestate.com\/blog\/wp-json\/wp\/v2\/tags?post=2668"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}