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Real Estate Bust Accelerates - V-Shaped Narrative Dead?

Real Estate Bust

EDITOR NOTE: While the market this morning jumped on a blowout pending home sales number and on “hopes coronavirus spikes will ease,” according to CNBC, investors are not paying attention to certain fundamental instabilities that threaten to wreck the entire financial system. Over the last few weeks, rents in San Francisco underwent an unprecedented drop. Manhattan office rents are currently plunging, potentially leading to a prolonged downturn. A third of all hotels in New York are likely to go bankrupt. In short, commercial real estate is getting decimated, and this slide is likely to take down a good chunk of the economy with it. Aside from this, we all know that a coronavirus vaccine, which can take up to 12 months at least to develop, is nowhere to be found. Folks, the V-shaped narrative is dead, unless you’re an optimist devoid of objectivity.

The last week of June marks the time when investors lost hope for a V-shaped economic recovery as confirmed COVID-19 cases are exponentially rising in Texas, Florida, and California, and the Tri-state area imposed quarantine restrictions on travelers. Reopening in some of these states has also been delayed as retailers close up brick and mortar shops for a second time. 

With that being said - the V-shaped recovery narrative is imploding - as many on Wall Street indiscriminately bought stocks (some used picking Scrabble letters to buy) as their belief in the Federal Reserve's money-printing would lift the economy out of one of the worst downturns since the 1930s. 

Though the economy was never lifted in a V-shaped formation, instead, the stock market rose to new highs as wreckless financial speculation led to an army of Robinhood daytraders buying bankrupted companies

With the euphoric period likely behind us, notably, because the Fed's balance sheet has contracted over the last several weeks and virus cases across the country are soaring - we now turn our attention to the commercial real estate bust. 

During euphoric periods, like what's happened over the last several months in financial markets, the bad news is usually overpowered with happy stories (sometimes from Larry Kudlow) - but as sentiment shifts - we must not lose track of the instabilities that can wreck the financial system.

Bloomberg cites a new report via real estate research firm Savills, which details how the Manhattan commercial real estate industry could be headed for a prolonged downturn if there's no V-shaped recovery in the economy. 

The report says Manhattan's office rents are likely headed to their lowest levels since 2012, that is if the economy doesn't have a speedy recovery. That means asking rents could drop by 26% to about $62.47 a square foot, the real estate services firm said. 

A speedy recovery or not - the trend in corporate America is to work from home - companies have found ways to implement remote access for employees - and this trend will only gain momentum. 

That being said, the office market in New York City is headed for a serious bust - with recovery years away. 

Many assume that when the stay-at-home measures are lifted, there will still be Covid-19 fears that will continue to materially influence behaviors and the economy," Savills said. "These fears will likely remain until a vaccine or antibody therapy is developed and widely available, which experts currently estimate is at least 12 months away."

It's not just the office market that is in trouble - we noted this week that one-third of hotels in the city could go bankrupt

The cracks in commercial real estate have already emerged, in early June, there was a massive jump in CMBS delinquencies, suggesting the bust has only begun. 

For more clarity on the recovery timeframes - UCLA Anderson Forecast's latest report suggests 2023.

Originally posted on ZeroHedge

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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