Speaker 1: Welcome to Prognosis. I'm Laura Carlson. It's day one and
Speaker 1: seventy five since coronavirus was declared a global pandemic. Today's
Speaker 1: main story. Coronavirus has dramatically changed the ways we shop
Speaker 1: and work, as office buildings, stores, and restaurants throughout the
Speaker 1: world sit empty. The real estate industry is fundamentally changing too.
Speaker 1: But first, here's what happened in virus News today. US
Speaker 1: infectious disease expert Anthony Faucci is warning that the long
Speaker 1: weekend could spur a wave of new infections. Fauci said
Speaker 1: on NBC's Today Show that the country's upcoming Labor Day
Speaker 1: holiday on September seven may lead to a rise in
Speaker 1: US coronavirus cases, as has been the case with other
Speaker 1: holidays earlier this summer. Faucci said a surge may be
Speaker 1: avoided if people wear masks and avoid crowded places. College
Speaker 1: students should stay on campus, he said, as sending them
Speaker 1: back home would help spread the virus. UK Prime Minister
Speaker 1: Boris Johnson announced another U turn on Wednesday, keeping lockdown
Speaker 1: rules in place as COVID nineteen cases rise. Johnson is
Speaker 1: pushing to get Britain's Back to Work and School and
Speaker 1: his team had previously decided restrictions imposed in some areas
Speaker 1: of Northwest England should be eased, but political opponents in
Speaker 1: the area condemned the plan and warned infections were rising again,
Speaker 1: causing the government to back down. Finally, Johnson and Johnson
Speaker 1: halted the development of a new flu drug after a
Speaker 1: study suggested it wouldn't work. It's a sign of how
Speaker 1: difficult it is to create treatments for viral infections, as
Speaker 1: the world racist to contain COVID nineteen. The drug promotive
Speaker 1: here was in the final stage of testing for patients
Speaker 1: with influenza A, the most common cause of the flu,
Speaker 1: when an ingim look at the data showed it was
Speaker 1: unlikely to be better than standard care in helping hospitalized patients.
Speaker 1: While the decision to shut down this drug trial doesn't
Speaker 1: have any bearing on the fate of drugs and vaccines
Speaker 1: being developed for coronavirus, it highlights the risk of failure
Speaker 1: as the world counts on the pharmaceutical industry to help
Speaker 1: safely return it to normal life. And now for today's
Speaker 1: main story, the future of the commercial real estate market
Speaker 1: has been under serious question that's thanks to the virus itself,
Speaker 1: a potential mass migration out of cities, and the new
Speaker 1: realities of working from home. For Bloomberg's Odd Lots podcast
Speaker 1: hosts Tracy Allaway and Joe Wisenthal spoke with Mosaic Real
Speaker 1: Estate Partners managing partner Ethan Penner, who has been described
Speaker 1: as the father of c mbs, or commercial mortgage backed securities.
Speaker 1: They discussed the stakes for commercial real estate in the
Speaker 1: US and what role the government should take to safeguard
Speaker 1: the billions of dollars worth of assets on the line.
Speaker 1: Here's an excerpt from their conversation. So, practically speaking, right
Speaker 1: now in New York, obviously for all kinds of issues,
Speaker 1: there's questions about office buildings, there's questions about areas that
Speaker 1: are retail and very tourists dominated we're just guessing at
Speaker 1: this point because we really don't know what the future
Speaker 1: looks like. We don't know when there will be a
Speaker 1: vaccine and so forth. How is it playing out right
Speaker 1: now as retailers tried to renegotiate with landlords and landlords
Speaker 1: tried to renegotiate with lenders, what is the discussion and
Speaker 1: the tension, what's happening right now in those rooms. It's
Speaker 1: not fun for anybody. You're talking about retail real estate,
Speaker 1: which is the most uncertain of all. You know, you've
Speaker 1: got retailer, you've got office hotels. To a certain extent,
Speaker 1: are the three areas where you've got the greatest uncertainty
Speaker 1: in that order, I would imagine. And and as it
Speaker 1: pertains to retail real there's existential issues that retailers themselves
Speaker 1: are facing. So you know, I think, uh, it'll it
Speaker 1: will be some lawyers who do very well in this
Speaker 1: process because I think that you're gonna see heightened litigation.
Speaker 1: You'll see bankruptcy lawyers doing very well, and I think
Speaker 1: a lot of it will be centered around retail. The
Speaker 1: counterbalance so far is that the easy monetary policy, and
Speaker 1: that's playing out not just with historically low interest rates,
Speaker 1: but also directs straight from the Fed to the banking
Speaker 1: community to be kind to borrowers and uh and not
Speaker 1: press them. You know, the old me might have not
Speaker 1: been too happy about that, because I'm a fairly strong
Speaker 1: market advocate, but I actually think it's it's the prudent
Speaker 1: thing to do. You know, the system itself is so
Speaker 1: today I had to say, historically fragile that it's the
Speaker 1: wise thing to do and is creating whatever audicum of
Speaker 1: stability that allows us to kind of breathe as easy
Speaker 1: as we can be breathing today considering how grave the
Speaker 1: crisis we're facing it. I'm curious about, you know, the
Speaker 1: sort of knock on effects, like I, let's say some
Speaker 1: of these assets really do they don't bounce back for years,
Speaker 1: prime real estate and hotels and offices and big cities
Speaker 1: like New York and other, Chicago and elsewhere. What are
Speaker 1: the then following effects, like who are the pools of
Speaker 1: owners of this dead and what does it do to
Speaker 1: them if they really have to take in the end
Speaker 1: sort of massive marks down markdowns on their holding. It's
Speaker 1: going to be very exciting to that play out because
Speaker 1: they're clearly, you know, one would suggest they're they're clearly
Speaker 1: going to be big losses that have to be born
Speaker 1: by someone, you know, some group of someone. There's always
Speaker 1: been a tug of war as to the allocation of
Speaker 1: those losses between the equity owner of party and their lender.
Speaker 1: It's a it's a it's an old kind of tradition
Speaker 1: in real estate when when things go well the property
Speaker 1: creates sufficient cash flow to pay and repay the lender,
Speaker 1: you know, when the loan tourers. But when things don't
Speaker 1: go well, the borrower calls a lender and says, we've
Speaker 1: got a problem. You know, instead of a kind of problems,
Speaker 1: we've got a problem. How are we going to fix it?
Speaker 1: Of course, the way it's supposed to be is the
Speaker 1: bob is supposed to lose everything because the lender has
Speaker 1: taken this safer position in lieu of upside. But again,
Speaker 1: as I go back to, because most lenders, even whole
Speaker 1: own lenders like banks, are just not set up to
Speaker 1: own property. There's been a long edition in real estate
Speaker 1: where when things don't go well, the lender recreates value
Speaker 1: or economic value because they don't have the will or
Speaker 1: the capacity to enforce their lean and take the borrower out.
Speaker 1: And so the lenders do lose money when they don't
Speaker 1: necessarily you wouldn't think they should because of the hierarchy
Speaker 1: of the capital structure. So how that all plays out
Speaker 1: will be very interesting to watch, But unquestionably there are
Speaker 1: losses in the system. I'm curious. So, you know, thinking
Speaker 1: back in two thousand two nine, that was truly a
Speaker 1: national prices and basically hit everywhere at the same time
Speaker 1: and arguably to the same severity this time. I mean,
Speaker 1: you know, I'm in New York and obviously people think
Speaker 1: it's going to be pretty bleak here for a while.
Speaker 1: But I was just in Austin, Texas for a while,
Speaker 1: and people this is booming and a lot of people
Speaker 1: are moving there. And so I'm curious how you see
Speaker 1: the sort of bifurcation of the economy where it's not
Speaker 1: just not necessarily a national recession or a national depression,
Speaker 1: but as simultaneous boom in one place, boom in some
Speaker 1: real estate market, boom in some office market, and crash
Speaker 1: another that that is a very accurate assessment of the
Speaker 1: way things are right now, which makes it very interesting
Speaker 1: in the center that there are definitely going to be
Speaker 1: winners and losers. Were in an impossible position and no
Speaker 1: one if you really predict exactly where things are. I
Speaker 1: have my opinions, but but I don't think the government
Speaker 1: can walk away because we're as close to anarchy as
Speaker 1: we've ever been in modern times. We're in a depression.
Speaker 1: So I'll tell you this, I think that we're in
Speaker 1: a depression like the nineteen thirties. But the difference between
Speaker 1: the nineties and now is the federal government's response. Right,
Speaker 1: in the nineteen thirties, there was no response, so nobody
Speaker 1: got helped. The banks were allowed to fail, everything was
Speaker 1: allowed to kind of go go under, and where there
Speaker 1: were breadlines and there was massive homelessness. Today you have
Speaker 1: massive government response, right, and so the massive government response
Speaker 1: is masking over some of the natural symptoms of the depression.
Speaker 1: And you know what, it's hard for someone subertarian leaning
Speaker 1: to say this, it's the only right choice. There is
Speaker 1: no other choice, and we're just going to have to
Speaker 1: get used to it. Those of us who are grew
Speaker 1: up lovers of the free market, we're just gonna have
Speaker 1: to suck it up and just say this is this
Speaker 1: is the new world that we're living and it's not
Speaker 1: going to change. And can't to just sort of describe
Speaker 1: the challenge. I mean, a, we've had this extraordinary government
Speaker 1: response so far. We'll see what further is going to come,
Speaker 1: but we also sort of describe the sort of sense
Speaker 1: of anarchy. Does that exacerbate it? The fact that different
Speaker 1: parts of the country are experiencing this moment, So differently.
Speaker 1: I think that what's likely to occur its rational. The
Speaker 1: rational things will occur, meaning investors, companies will go to
Speaker 1: places that they feel it can deliver things that benefit
Speaker 1: companies and the and their constituents, primarily their employees. Right, So,
Speaker 1: companies will move from places where perhaps physical safety is
Speaker 1: not as u not as certain, or fiscal imbalances create
Speaker 1: a need for higher taxation, and they're going to move
Speaker 1: to places where physical safety is perceived to be better
Speaker 1: and taxation lighter. And uh, that's true for employers, and
Speaker 1: it's true for the wealthiest of the communities who pay
Speaker 1: a lot of the taxes. As you know, New York
Speaker 1: its budgets paid for by one percent of the tax payer.
Speaker 1: So that creates this downward spiral it's very very hard
Speaker 1: to undo. And uh, and then a very bullish spiral
Speaker 1: for the kind of recipients of these movers and the
Speaker 1: states that people are coming to. How that ultimately plays out,
Speaker 1: because if you play it out to its logical conclusion,
Speaker 1: you're going to have dystopian cities around this country and
Speaker 1: it's going to be really, really weird, and the federal
Speaker 1: government is have to make a decision. I think about
Speaker 1: what is the United States? Right? I mean, there's there's
Speaker 1: some really big questions that really have never been asked
Speaker 1: for a couple hundred years in this country that will
Speaker 1: need to be asked if this plays out the way
Speaker 1: I think that was Joe Wisenthal in conversation with Ethan Penner.
Speaker 1: For the full interview, listen to the Odd Lots episode,
Speaker 1: available now on Apple Podcasts, Spotify, or wherever you listen.
Speaker 1: And that's it for our show today. For coverage of
Speaker 1: the outbreak from one and twenty bureaus around the world,
Speaker 1: visit Bloomberg dot com slash Coronavirus and if you like
Speaker 1: the show, please leave us a review and a rating
Speaker 1: on Apple Podcasts or Spotify. It's the best way to
Speaker 1: help more listeners find our global reporting. The Prognosis Daily
Speaker 1: edition is produced by Topher foreheads Jordan Gospore, Magnus Hendrickson,
Speaker 1: and me Laura Carlson. Today's main story was reported by
Speaker 1: Joe Wisenthal and Tracy Alloway. Original music by Leo Sedrin.
Speaker 1: Our editors are Francesca Levi and Rick Shine. Francesca Levi
Speaker 1: is Bloomberg's head of Podcasts. Thanks for listening.