Capital Alert: A Proverbial Tale of Two Cities

August 28,  2020

A Proverbial Tale of Two Cities

There are reasons for optimism this week. The number of new COVID-19 cases has fallen to the lowest level in more than two months, early vaccine trials are showing promising results, and durable goods orders surged in July on strong demand for cars and trucks. 

However, as the pandemic persists into its sixth month, a proverbial tale of two cities has emerged. Higher-income Americans are recovering and even prospering, while the poor face an unprecedented humanitarian crisis. While Congress splits hairs over the next round of stimulus, tens of millions of Americans face the risk of eviction, and a growing number of families struggle to access food. Meanwhile, a catastrophic hurricane has battered the Gulf Coast and wildfires have decimated more than 2,000 structures across northern California.

As the pandemic persists into its sixth month, a proverbial tale of two cities has emerged.

Nowhere is the disconnect with fundamentals more apparent than in the stock market. The economy, though showing signs of improvement, remains in its deepest recession since 2008. But with the Federal Reserve signaling no end to near-zero interest rates, investors have fled bonds and Treasuries and piled into equities. Since hitting its low on March 23, the S&P 500 has rebounded more than 53 percent to all-time highs. 

Amid a swift adoption of digital technologies, Apple, Microsoft, Amazon, Facebook and Google parent company Alphabet have dominated the rally, and now comprise more than 20 percent of the S&P 500’s total value. On the opposite end of the spectrum, airline stocks have declined sharply as the number of passengers crossing through TSA checkpoints plummeted by 74 percent in July compared to a year ago. The industry has warned that 75,000 jobs could be cut if a second federal bailout fails to materialize. Retail is also a story of winners and losers, with omnichannel big box chains like Walmart and Target scoring record e-commerce sales, while one-third of New York’s small businesses may be gone for good.


Recovery will ultimately hinge on a rebound in consumer spending — which accounts for 70 percent of economic activity — and the outlook remains challenging. Consumer confidence fell to its lowest level in six years in early August and unemployment remains above 10 percent, with a sharp bifurcation by income. The jobless rate among low-wage Americans has soared to 16 percent since the pandemic began, while employment among workers earning $60,000 or more has nearly rebounded to pre-COVID levels. These are the professionals flocking to the suburbs and driving up housing starts, building permits and sales at Home Depot.


As for commercial real estate, investment returns officially fell into negative territory for all asset types except industrial in the second quarter, the worst showing since 2009, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). The overall decline was -2.76 percent on a leveraged basis. Transactions also plummeted to their lowest level since the Great Recession. There is a wall of capital sitting on the sidelines waiting for capitulation.


On the financing front, deals are getting done for high-quality borrowers on multifamily properties, self-storage, net lease assets and select office properties with long-term tenants. Loan-to-value ratios have been dialed back significantly. Depending on asset class, rates are ranging from 2.6 to 3.20 percent for agency lending; the low to high 3s for banks; and 3.10 and 4.0 percent for insurance companies and CMBS. MMCC remains very active and engaged, closing hundreds of loans with a wide array of capital sources. Amid continuing uncertainty and risk, many owners and investors are locking into longer-term financing at historically low rates to ride out the COVID-19 disruption. Please reach out to your MMCC Advisor for help executing the optimal capital solution.

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