This is my perspective as of mid-March. This is definitely a fluid and fast moving situation, so things could change.
The worldwide pandemic due to the coronavirus is a significant blow to our world health and economies. We believe at this point, we will be heading into a recession and the federal government will be providing significant stimulus to buoy the economy. With that in mind, here is how we believe this will impact our real estate investments.
- Real Estate Prices Move Slowly Compared to Stock Market — While we’ve all seen stock prices fall significantly over the past few weeks, sellers have not reacted to this as much. We not believe cap rates will move significantly very soon, and this would potentially be a lagging indicator for next week.
- While Cash is King, cash flow is just as good — Our investment thesis of investing in cash flowing assets with no dependency on appreciation provides us a strong mitigation factor to the current economic environment. Already, capital is fleeing to safer assets like bonds, which in turn need to be deployed in debt funds into stabilized assets like commercial real estate.
- The Fed has cut rates to nearly 0. — Since this crisis occured, our cost of borrowing has lowered by more than 100 bps. It could fall by another 50bps, which in total could yield almost $50k in annual reduction in our debt service. We are also investing in assets like Grocers Warehouse that have significantly high DSCR — which is a strong buffer against insolvency.
- Real Estate is a great hedge against inflation. — The government will start quantitative easing which should inflate the dollar. Real assets like Real Estate will also inflate in price over time. Long term debt will be cheaper as the same dollar amount we borrow today will be cheaper in 5 years.
- Increases vacancy will be mitigated by long term leases with healthy businesses — We are partners with the businesses that are our tenants. We are connected with these business and are ensuring their health. To the extent that these business haven’t been impacted due to their B2B nature — and limited reliance on short term consumption, we feel good about the leases we have with these businesses.