1 00:00:01,120 --> 00:00:06,040 Speaker 1: Welcome to Prognosis. I'm Laura Carlson. It's day one and 2 00:00:06,120 --> 00:00:11,400 Speaker 1: seventy five since coronavirus was declared a global pandemic. Today's 3 00:00:11,440 --> 00:00:16,480 Speaker 1: main story. Coronavirus has dramatically changed the ways we shop 4 00:00:16,680 --> 00:00:21,400 Speaker 1: and work, as office buildings, stores, and restaurants throughout the 5 00:00:21,440 --> 00:00:27,520 Speaker 1: world sit empty. The real estate industry is fundamentally changing too. 6 00:00:29,080 --> 00:00:39,880 Speaker 1: But first, here's what happened in virus News today. US 7 00:00:39,960 --> 00:00:43,880 Speaker 1: infectious disease expert Anthony Faucci is warning that the long 8 00:00:43,960 --> 00:00:48,520 Speaker 1: weekend could spur a wave of new infections. Fauci said 9 00:00:48,520 --> 00:00:52,279 Speaker 1: on NBC's Today Show that the country's upcoming Labor Day 10 00:00:52,320 --> 00:00:56,120 Speaker 1: holiday on September seven may lead to a rise in 11 00:00:56,320 --> 00:01:00,240 Speaker 1: US coronavirus cases, as has been the case with other 12 00:01:00,320 --> 00:01:05,320 Speaker 1: holidays earlier this summer. Faucci said a surge may be 13 00:01:05,480 --> 00:01:10,960 Speaker 1: avoided if people wear masks and avoid crowded places. College 14 00:01:10,959 --> 00:01:15,200 Speaker 1: students should stay on campus, he said, as sending them 15 00:01:15,200 --> 00:01:20,640 Speaker 1: back home would help spread the virus. UK Prime Minister 16 00:01:20,800 --> 00:01:25,640 Speaker 1: Boris Johnson announced another U turn on Wednesday, keeping lockdown 17 00:01:25,720 --> 00:01:31,480 Speaker 1: rules in place as COVID nineteen cases rise. Johnson is 18 00:01:31,640 --> 00:01:35,640 Speaker 1: pushing to get Britain's Back to Work and School and 19 00:01:35,840 --> 00:01:40,520 Speaker 1: his team had previously decided restrictions imposed in some areas 20 00:01:40,560 --> 00:01:45,880 Speaker 1: of Northwest England should be eased, but political opponents in 21 00:01:45,920 --> 00:01:50,440 Speaker 1: the area condemned the plan and warned infections were rising again, 22 00:01:51,120 --> 00:01:56,680 Speaker 1: causing the government to back down. Finally, Johnson and Johnson 23 00:01:56,880 --> 00:01:59,600 Speaker 1: halted the development of a new flu drug after a 24 00:01:59,600 --> 00:02:03,840 Speaker 1: study suggested it wouldn't work. It's a sign of how 25 00:02:03,880 --> 00:02:07,720 Speaker 1: difficult it is to create treatments for viral infections, as 26 00:02:07,720 --> 00:02:12,600 Speaker 1: the world racist to contain COVID nineteen. The drug promotive 27 00:02:12,600 --> 00:02:15,440 Speaker 1: here was in the final stage of testing for patients 28 00:02:15,440 --> 00:02:19,160 Speaker 1: with influenza A, the most common cause of the flu, 29 00:02:20,000 --> 00:02:22,800 Speaker 1: when an ingim look at the data showed it was 30 00:02:23,080 --> 00:02:28,080 Speaker 1: unlikely to be better than standard care in helping hospitalized patients. 31 00:02:29,320 --> 00:02:32,400 Speaker 1: While the decision to shut down this drug trial doesn't 32 00:02:32,520 --> 00:02:35,400 Speaker 1: have any bearing on the fate of drugs and vaccines 33 00:02:35,440 --> 00:02:39,720 Speaker 1: being developed for coronavirus, it highlights the risk of failure 34 00:02:40,040 --> 00:02:43,560 Speaker 1: as the world counts on the pharmaceutical industry to help 35 00:02:43,639 --> 00:02:51,919 Speaker 1: safely return it to normal life. And now for today's 36 00:02:51,960 --> 00:02:56,160 Speaker 1: main story, the future of the commercial real estate market 37 00:02:56,200 --> 00:03:01,200 Speaker 1: has been under serious question that's thanks to the virus itself, 38 00:03:01,560 --> 00:03:05,120 Speaker 1: a potential mass migration out of cities, and the new 39 00:03:05,160 --> 00:03:10,000 Speaker 1: realities of working from home. For Bloomberg's Odd Lots podcast 40 00:03:10,320 --> 00:03:14,399 Speaker 1: hosts Tracy Allaway and Joe Wisenthal spoke with Mosaic Real 41 00:03:14,520 --> 00:03:19,639 Speaker 1: Estate Partners managing partner Ethan Penner, who has been described 42 00:03:19,840 --> 00:03:25,040 Speaker 1: as the father of c mbs, or commercial mortgage backed securities. 43 00:03:26,000 --> 00:03:28,880 Speaker 1: They discussed the stakes for commercial real estate in the 44 00:03:29,040 --> 00:03:33,280 Speaker 1: US and what role the government should take to safeguard 45 00:03:33,320 --> 00:03:36,520 Speaker 1: the billions of dollars worth of assets on the line. 46 00:03:37,480 --> 00:03:43,640 Speaker 1: Here's an excerpt from their conversation. So, practically speaking, right 47 00:03:43,640 --> 00:03:46,680 Speaker 1: now in New York, obviously for all kinds of issues, 48 00:03:46,720 --> 00:03:50,760 Speaker 1: there's questions about office buildings, there's questions about areas that 49 00:03:50,800 --> 00:03:55,040 Speaker 1: are retail and very tourists dominated we're just guessing at 50 00:03:55,040 --> 00:03:57,320 Speaker 1: this point because we really don't know what the future 51 00:03:57,360 --> 00:03:58,560 Speaker 1: looks like. We don't know when there will be a 52 00:03:58,640 --> 00:04:02,720 Speaker 1: vaccine and so forth. How is it playing out right 53 00:04:02,760 --> 00:04:09,040 Speaker 1: now as retailers tried to renegotiate with landlords and landlords 54 00:04:09,080 --> 00:04:13,880 Speaker 1: tried to renegotiate with lenders, what is the discussion and 55 00:04:13,960 --> 00:04:18,640 Speaker 1: the tension, what's happening right now in those rooms. It's 56 00:04:18,640 --> 00:04:22,839 Speaker 1: not fun for anybody. You're talking about retail real estate, 57 00:04:23,040 --> 00:04:27,520 Speaker 1: which is the most uncertain of all. You know, you've 58 00:04:27,560 --> 00:04:31,040 Speaker 1: got retailer, you've got office hotels. To a certain extent, 59 00:04:31,680 --> 00:04:34,880 Speaker 1: are the three areas where you've got the greatest uncertainty 60 00:04:35,200 --> 00:04:38,240 Speaker 1: in that order, I would imagine. And and as it 61 00:04:38,320 --> 00:04:43,840 Speaker 1: pertains to retail real there's existential issues that retailers themselves 62 00:04:43,920 --> 00:04:47,960 Speaker 1: are facing. So you know, I think, uh, it'll it 63 00:04:48,040 --> 00:04:51,000 Speaker 1: will be some lawyers who do very well in this 64 00:04:51,160 --> 00:04:54,839 Speaker 1: process because I think that you're gonna see heightened litigation. 65 00:04:55,240 --> 00:04:58,400 Speaker 1: You'll see bankruptcy lawyers doing very well, and I think 66 00:04:58,480 --> 00:05:01,320 Speaker 1: a lot of it will be centered around retail. The 67 00:05:01,400 --> 00:05:06,160 Speaker 1: counterbalance so far is that the easy monetary policy, and 68 00:05:06,200 --> 00:05:10,040 Speaker 1: that's playing out not just with historically low interest rates, 69 00:05:10,080 --> 00:05:15,440 Speaker 1: but also directs straight from the Fed to the banking 70 00:05:15,480 --> 00:05:21,200 Speaker 1: community to be kind to borrowers and uh and not 71 00:05:21,400 --> 00:05:25,880 Speaker 1: press them. You know, the old me might have not 72 00:05:26,040 --> 00:05:29,400 Speaker 1: been too happy about that, because I'm a fairly strong 73 00:05:29,839 --> 00:05:34,440 Speaker 1: market advocate, but I actually think it's it's the prudent 74 00:05:34,480 --> 00:05:37,560 Speaker 1: thing to do. You know, the system itself is so 75 00:05:38,520 --> 00:05:42,560 Speaker 1: today I had to say, historically fragile that it's the 76 00:05:42,600 --> 00:05:46,360 Speaker 1: wise thing to do and is creating whatever audicum of 77 00:05:46,440 --> 00:05:50,119 Speaker 1: stability that allows us to kind of breathe as easy 78 00:05:50,160 --> 00:05:53,640 Speaker 1: as we can be breathing today considering how grave the 79 00:05:53,720 --> 00:05:57,720 Speaker 1: crisis we're facing it. I'm curious about, you know, the 80 00:05:57,800 --> 00:05:59,760 Speaker 1: sort of knock on effects, like I, let's say some 81 00:05:59,839 --> 00:06:03,880 Speaker 1: of these assets really do they don't bounce back for years, 82 00:06:04,160 --> 00:06:07,599 Speaker 1: prime real estate and hotels and offices and big cities 83 00:06:07,640 --> 00:06:12,080 Speaker 1: like New York and other, Chicago and elsewhere. What are 84 00:06:12,160 --> 00:06:15,080 Speaker 1: the then following effects, like who are the pools of 85 00:06:15,120 --> 00:06:17,640 Speaker 1: owners of this dead and what does it do to 86 00:06:17,720 --> 00:06:20,480 Speaker 1: them if they really have to take in the end 87 00:06:20,560 --> 00:06:26,080 Speaker 1: sort of massive marks down markdowns on their holding. It's 88 00:06:26,080 --> 00:06:29,640 Speaker 1: going to be very exciting to that play out because 89 00:06:30,400 --> 00:06:34,600 Speaker 1: they're clearly, you know, one would suggest they're they're clearly 90 00:06:34,680 --> 00:06:38,160 Speaker 1: going to be big losses that have to be born 91 00:06:39,160 --> 00:06:43,520 Speaker 1: by someone, you know, some group of someone. There's always 92 00:06:43,600 --> 00:06:46,400 Speaker 1: been a tug of war as to the allocation of 93 00:06:46,400 --> 00:06:50,880 Speaker 1: those losses between the equity owner of party and their lender. 94 00:06:52,000 --> 00:06:55,160 Speaker 1: It's a it's a it's an old kind of tradition 95 00:06:55,440 --> 00:06:59,920 Speaker 1: in real estate when when things go well the property 96 00:07:00,360 --> 00:07:04,000 Speaker 1: creates sufficient cash flow to pay and repay the lender, 97 00:07:04,360 --> 00:07:08,120 Speaker 1: you know, when the loan tourers. But when things don't 98 00:07:08,160 --> 00:07:12,040 Speaker 1: go well, the borrower calls a lender and says, we've 99 00:07:12,080 --> 00:07:14,520 Speaker 1: got a problem. You know, instead of a kind of problems, 100 00:07:14,520 --> 00:07:16,960 Speaker 1: we've got a problem. How are we going to fix it? 101 00:07:17,880 --> 00:07:19,640 Speaker 1: Of course, the way it's supposed to be is the 102 00:07:19,680 --> 00:07:22,640 Speaker 1: bob is supposed to lose everything because the lender has 103 00:07:22,760 --> 00:07:27,400 Speaker 1: taken this safer position in lieu of upside. But again, 104 00:07:27,440 --> 00:07:31,200 Speaker 1: as I go back to, because most lenders, even whole 105 00:07:31,240 --> 00:07:34,160 Speaker 1: own lenders like banks, are just not set up to 106 00:07:34,240 --> 00:07:38,239 Speaker 1: own property. There's been a long edition in real estate 107 00:07:38,720 --> 00:07:43,160 Speaker 1: where when things don't go well, the lender recreates value 108 00:07:43,280 --> 00:07:47,160 Speaker 1: or economic value because they don't have the will or 109 00:07:47,200 --> 00:07:51,480 Speaker 1: the capacity to enforce their lean and take the borrower out. 110 00:07:51,960 --> 00:07:54,920 Speaker 1: And so the lenders do lose money when they don't 111 00:07:54,920 --> 00:07:58,400 Speaker 1: necessarily you wouldn't think they should because of the hierarchy 112 00:07:58,640 --> 00:08:02,360 Speaker 1: of the capital structure. So how that all plays out 113 00:08:02,560 --> 00:08:06,960 Speaker 1: will be very interesting to watch, But unquestionably there are 114 00:08:07,040 --> 00:08:11,320 Speaker 1: losses in the system. I'm curious. So, you know, thinking 115 00:08:11,360 --> 00:08:14,760 Speaker 1: back in two thousand two nine, that was truly a 116 00:08:14,880 --> 00:08:18,680 Speaker 1: national prices and basically hit everywhere at the same time 117 00:08:18,840 --> 00:08:22,480 Speaker 1: and arguably to the same severity this time. I mean, 118 00:08:22,600 --> 00:08:26,200 Speaker 1: you know, I'm in New York and obviously people think 119 00:08:26,240 --> 00:08:27,920 Speaker 1: it's going to be pretty bleak here for a while. 120 00:08:27,960 --> 00:08:30,480 Speaker 1: But I was just in Austin, Texas for a while, 121 00:08:30,520 --> 00:08:32,600 Speaker 1: and people this is booming and a lot of people 122 00:08:32,600 --> 00:08:35,600 Speaker 1: are moving there. And so I'm curious how you see 123 00:08:35,679 --> 00:08:38,600 Speaker 1: the sort of bifurcation of the economy where it's not 124 00:08:38,720 --> 00:08:41,880 Speaker 1: just not necessarily a national recession or a national depression, 125 00:08:42,320 --> 00:08:45,880 Speaker 1: but as simultaneous boom in one place, boom in some 126 00:08:46,000 --> 00:08:49,680 Speaker 1: real estate market, boom in some office market, and crash 127 00:08:49,720 --> 00:08:54,840 Speaker 1: another that that is a very accurate assessment of the 128 00:08:54,880 --> 00:08:59,280 Speaker 1: way things are right now, which makes it very interesting 129 00:08:59,520 --> 00:09:02,320 Speaker 1: in the center that there are definitely going to be 130 00:09:02,360 --> 00:09:07,040 Speaker 1: winners and losers. Were in an impossible position and no 131 00:09:07,480 --> 00:09:09,760 Speaker 1: one if you really predict exactly where things are. I 132 00:09:09,840 --> 00:09:13,400 Speaker 1: have my opinions, but but I don't think the government 133 00:09:13,440 --> 00:09:18,040 Speaker 1: can walk away because we're as close to anarchy as 134 00:09:18,080 --> 00:09:21,439 Speaker 1: we've ever been in modern times. We're in a depression. 135 00:09:21,480 --> 00:09:23,000 Speaker 1: So I'll tell you this, I think that we're in 136 00:09:23,040 --> 00:09:26,440 Speaker 1: a depression like the nineteen thirties. But the difference between 137 00:09:26,480 --> 00:09:31,320 Speaker 1: the nineties and now is the federal government's response. Right, 138 00:09:31,360 --> 00:09:35,720 Speaker 1: in the nineteen thirties, there was no response, so nobody 139 00:09:35,800 --> 00:09:39,439 Speaker 1: got helped. The banks were allowed to fail, everything was 140 00:09:39,480 --> 00:09:43,319 Speaker 1: allowed to kind of go go under, and where there 141 00:09:43,320 --> 00:09:46,680 Speaker 1: were breadlines and there was massive homelessness. Today you have 142 00:09:47,400 --> 00:09:51,360 Speaker 1: massive government response, right, and so the massive government response 143 00:09:52,040 --> 00:09:55,559 Speaker 1: is masking over some of the natural symptoms of the depression. 144 00:09:56,320 --> 00:10:01,040 Speaker 1: And you know what, it's hard for someone subertarian leaning 145 00:10:01,080 --> 00:10:04,480 Speaker 1: to say this, it's the only right choice. There is 146 00:10:04,520 --> 00:10:07,040 Speaker 1: no other choice, and we're just going to have to 147 00:10:07,080 --> 00:10:09,760 Speaker 1: get used to it. Those of us who are grew 148 00:10:09,840 --> 00:10:12,960 Speaker 1: up lovers of the free market, we're just gonna have 149 00:10:13,040 --> 00:10:15,400 Speaker 1: to suck it up and just say this is this 150 00:10:15,440 --> 00:10:17,360 Speaker 1: is the new world that we're living and it's not 151 00:10:17,400 --> 00:10:22,280 Speaker 1: going to change. And can't to just sort of describe 152 00:10:22,440 --> 00:10:25,840 Speaker 1: the challenge. I mean, a, we've had this extraordinary government 153 00:10:25,920 --> 00:10:29,480 Speaker 1: response so far. We'll see what further is going to come, 154 00:10:29,520 --> 00:10:31,280 Speaker 1: but we also sort of describe the sort of sense 155 00:10:31,280 --> 00:10:34,920 Speaker 1: of anarchy. Does that exacerbate it? The fact that different 156 00:10:34,920 --> 00:10:38,640 Speaker 1: parts of the country are experiencing this moment, So differently. 157 00:10:39,080 --> 00:10:42,559 Speaker 1: I think that what's likely to occur its rational. The 158 00:10:43,000 --> 00:10:48,520 Speaker 1: rational things will occur, meaning investors, companies will go to 159 00:10:48,720 --> 00:10:55,000 Speaker 1: places that they feel it can deliver things that benefit 160 00:10:55,120 --> 00:10:59,760 Speaker 1: companies and the and their constituents, primarily their employees. Right, So, 161 00:11:00,040 --> 00:11:05,360 Speaker 1: companies will move from places where perhaps physical safety is 162 00:11:05,400 --> 00:11:10,560 Speaker 1: not as u not as certain, or fiscal imbalances create 163 00:11:10,600 --> 00:11:13,560 Speaker 1: a need for higher taxation, and they're going to move 164 00:11:13,600 --> 00:11:17,199 Speaker 1: to places where physical safety is perceived to be better 165 00:11:17,480 --> 00:11:23,040 Speaker 1: and taxation lighter. And uh, that's true for employers, and 166 00:11:23,080 --> 00:11:26,840 Speaker 1: it's true for the wealthiest of the communities who pay 167 00:11:26,840 --> 00:11:29,160 Speaker 1: a lot of the taxes. As you know, New York 168 00:11:30,440 --> 00:11:33,200 Speaker 1: its budgets paid for by one percent of the tax payer. 169 00:11:33,320 --> 00:11:37,800 Speaker 1: So that creates this downward spiral it's very very hard 170 00:11:37,840 --> 00:11:41,960 Speaker 1: to undo. And uh, and then a very bullish spiral 171 00:11:42,120 --> 00:11:46,120 Speaker 1: for the kind of recipients of these movers and the 172 00:11:46,240 --> 00:11:49,880 Speaker 1: states that people are coming to. How that ultimately plays out, 173 00:11:49,920 --> 00:11:53,040 Speaker 1: because if you play it out to its logical conclusion, 174 00:11:53,520 --> 00:11:58,960 Speaker 1: you're going to have dystopian cities around this country and 175 00:11:59,000 --> 00:12:02,480 Speaker 1: it's going to be really, really weird, and the federal 176 00:12:02,520 --> 00:12:06,400 Speaker 1: government is have to make a decision. I think about 177 00:12:07,000 --> 00:12:09,800 Speaker 1: what is the United States? Right? I mean, there's there's 178 00:12:09,840 --> 00:12:12,679 Speaker 1: some really big questions that really have never been asked 179 00:12:13,120 --> 00:12:16,640 Speaker 1: for a couple hundred years in this country that will 180 00:12:16,679 --> 00:12:18,400 Speaker 1: need to be asked if this plays out the way 181 00:12:18,400 --> 00:12:29,160 Speaker 1: I think that was Joe Wisenthal in conversation with Ethan Penner. 182 00:12:29,880 --> 00:12:32,560 Speaker 1: For the full interview, listen to the Odd Lots episode, 183 00:12:32,760 --> 00:12:36,959 Speaker 1: available now on Apple Podcasts, Spotify, or wherever you listen. 184 00:12:37,920 --> 00:12:40,400 Speaker 1: And that's it for our show today. For coverage of 185 00:12:40,400 --> 00:12:43,240 Speaker 1: the outbreak from one and twenty bureaus around the world, 186 00:12:43,559 --> 00:12:48,160 Speaker 1: visit Bloomberg dot com slash Coronavirus and if you like 187 00:12:48,280 --> 00:12:50,760 Speaker 1: the show, please leave us a review and a rating 188 00:12:51,120 --> 00:12:54,680 Speaker 1: on Apple Podcasts or Spotify. It's the best way to 189 00:12:54,720 --> 00:12:59,600 Speaker 1: help more listeners find our global reporting. The Prognosis Daily 190 00:12:59,720 --> 00:13:04,559 Speaker 1: edition is produced by Topher foreheads Jordan Gospore, Magnus Hendrickson, 191 00:13:04,760 --> 00:13:09,200 Speaker 1: and me Laura Carlson. Today's main story was reported by 192 00:13:09,280 --> 00:13:13,960 Speaker 1: Joe Wisenthal and Tracy Alloway. Original music by Leo Sedrin. 193 00:13:14,480 --> 00:13:19,280 Speaker 1: Our editors are Francesca Levi and Rick Shine. Francesca Levi 194 00:13:19,559 --> 00:13:22,840 Speaker 1: is Bloomberg's head of Podcasts. Thanks for listening.