WEBVTT - A System Shock to the Real Estate Economy 0:00:01.120 --> 0:00:06.040 Welcome to Prognosis. I'm Laura Carlson. It's day one and 0:00:06.120 --> 0:00:11.400 seventy five since coronavirus was declared a global pandemic. Today's 0:00:11.440 --> 0:00:16.480 main story. Coronavirus has dramatically changed the ways we shop 0:00:16.680 --> 0:00:21.400 and work, as office buildings, stores, and restaurants throughout the 0:00:21.440 --> 0:00:27.520 world sit empty. The real estate industry is fundamentally changing too. 0:00:29.080 --> 0:00:39.880 But first, here's what happened in virus News today. US 0:00:39.960 --> 0:00:43.880 infectious disease expert Anthony Faucci is warning that the long 0:00:43.960 --> 0:00:48.520 weekend could spur a wave of new infections. Fauci said 0:00:48.520 --> 0:00:52.279 on NBC's Today Show that the country's upcoming Labor Day 0:00:52.320 --> 0:00:56.120 holiday on September seven may lead to a rise in 0:00:56.320 --> 0:01:00.240 US coronavirus cases, as has been the case with other 0:01:00.320 --> 0:01:05.320 holidays earlier this summer. Faucci said a surge may be 0:01:05.480 --> 0:01:10.960 avoided if people wear masks and avoid crowded places. College 0:01:10.959 --> 0:01:15.200 students should stay on campus, he said, as sending them 0:01:15.200 --> 0:01:20.640 back home would help spread the virus. UK Prime Minister 0:01:20.800 --> 0:01:25.640 Boris Johnson announced another U turn on Wednesday, keeping lockdown 0:01:25.720 --> 0:01:31.480 rules in place as COVID nineteen cases rise. Johnson is 0:01:31.640 --> 0:01:35.640 pushing to get Britain's Back to Work and School and 0:01:35.840 --> 0:01:40.520 his team had previously decided restrictions imposed in some areas 0:01:40.560 --> 0:01:45.880 of Northwest England should be eased, but political opponents in 0:01:45.920 --> 0:01:50.440 the area condemned the plan and warned infections were rising again, 0:01:51.120 --> 0:01:56.680 causing the government to back down. Finally, Johnson and Johnson 0:01:56.880 --> 0:01:59.600 halted the development of a new flu drug after a 0:01:59.600 --> 0:02:03.840 study suggested it wouldn't work. It's a sign of how 0:02:03.880 --> 0:02:07.720 difficult it is to create treatments for viral infections, as 0:02:07.720 --> 0:02:12.600 the world racist to contain COVID nineteen. The drug promotive 0:02:12.600 --> 0:02:15.440 here was in the final stage of testing for patients 0:02:15.440 --> 0:02:19.160 with influenza A, the most common cause of the flu, 0:02:20.000 --> 0:02:22.800 when an ingim look at the data showed it was 0:02:23.080 --> 0:02:28.080 unlikely to be better than standard care in helping hospitalized patients. 0:02:29.320 --> 0:02:32.400 While the decision to shut down this drug trial doesn't 0:02:32.520 --> 0:02:35.400 have any bearing on the fate of drugs and vaccines 0:02:35.440 --> 0:02:39.720 being developed for coronavirus, it highlights the risk of failure 0:02:40.040 --> 0:02:43.560 as the world counts on the pharmaceutical industry to help 0:02:43.639 --> 0:02:51.919 safely return it to normal life. And now for today's 0:02:51.960 --> 0:02:56.160 main story, the future of the commercial real estate market 0:02:56.200 --> 0:03:01.200 has been under serious question that's thanks to the virus itself, 0:03:01.560 --> 0:03:05.120 a potential mass migration out of cities, and the new 0:03:05.160 --> 0:03:10.000 realities of working from home. For Bloomberg's Odd Lots podcast 0:03:10.320 --> 0:03:14.399 hosts Tracy Allaway and Joe Wisenthal spoke with Mosaic Real 0:03:14.520 --> 0:03:19.639 Estate Partners managing partner Ethan Penner, who has been described 0:03:19.840 --> 0:03:25.040 as the father of c mbs, or commercial mortgage backed securities. 0:03:26.000 --> 0:03:28.880 They discussed the stakes for commercial real estate in the 0:03:29.040 --> 0:03:33.280 US and what role the government should take to safeguard 0:03:33.320 --> 0:03:36.520 the billions of dollars worth of assets on the line. 0:03:37.480 --> 0:03:43.640 Here's an excerpt from their conversation. So, practically speaking, right 0:03:43.640 --> 0:03:46.680 now in New York, obviously for all kinds of issues, 0:03:46.720 --> 0:03:50.760 there's questions about office buildings, there's questions about areas that 0:03:50.800 --> 0:03:55.040 are retail and very tourists dominated we're just guessing at 0:03:55.040 --> 0:03:57.320 this point because we really don't know what the future 0:03:57.360 --> 0:03:58.560 looks like. We don't know when there will be a 0:03:58.640 --> 0:04:02.720 vaccine and so forth. How is it playing out right 0:04:02.760 --> 0:04:09.040 now as retailers tried to renegotiate with landlords and landlords 0:04:09.080 --> 0:04:13.880 tried to renegotiate with lenders, what is the discussion and 0:04:13.960 --> 0:04:18.640 the tension, what's happening right now in those rooms. It's 0:04:18.640 --> 0:04:22.839 not fun for anybody. You're talking about retail real estate, 0:04:23.040 --> 0:04:27.520 which is the most uncertain of all. You know, you've 0:04:27.560 --> 0:04:31.040 got retailer, you've got office hotels. To a certain extent, 0:04:31.680 --> 0:04:34.880 are the three areas where you've got the greatest uncertainty 0:04:35.200 --> 0:04:38.240 in that order, I would imagine. And and as it 0:04:38.320 --> 0:04:43.840 pertains to retail real there's existential issues that retailers themselves 0:04:43.920 --> 0:04:47.960 are facing. So you know, I think, uh, it'll it 0:04:48.040 --> 0:04:51.000 will be some lawyers who do very well in this 0:04:51.160 --> 0:04:54.839 process because I think that you're gonna see heightened litigation. 0:04:55.240 --> 0:04:58.400 You'll see bankruptcy lawyers doing very well, and I think 0:04:58.480 --> 0:05:01.320 a lot of it will be centered around retail. The 0:05:01.400 --> 0:05:06.160 counterbalance so far is that the easy monetary policy, and 0:05:06.200 --> 0:05:10.040 that's playing out not just with historically low interest rates, 0:05:10.080 --> 0:05:15.440 but also directs straight from the Fed to the banking 0:05:15.480 --> 0:05:21.200 community to be kind to borrowers and uh and not 0:05:21.400 --> 0:05:25.880 press them. You know, the old me might have not 0:05:26.040 --> 0:05:29.400 been too happy about that, because I'm a fairly strong 0:05:29.839 --> 0:05:34.440 market advocate, but I actually think it's it's the prudent 0:05:34.480 --> 0:05:37.560 thing to do. You know, the system itself is so 0:05:38.520 --> 0:05:42.560 today I had to say, historically fragile that it's the 0:05:42.600 --> 0:05:46.360 wise thing to do and is creating whatever audicum of 0:05:46.440 --> 0:05:50.119 stability that allows us to kind of breathe as easy 0:05:50.160 --> 0:05:53.640 as we can be breathing today considering how grave the 0:05:53.720 --> 0:05:57.720 crisis we're facing it. I'm curious about, you know, the 0:05:57.800 --> 0:05:59.760 sort of knock on effects, like I, let's say some 0:05:59.839 --> 0:06:03.880 of these assets really do they don't bounce back for years, 0:06:04.160 --> 0:06:07.599 prime real estate and hotels and offices and big cities 0:06:07.640 --> 0:06:12.080 like New York and other, Chicago and elsewhere. What are 0:06:12.160 --> 0:06:15.080 the then following effects, like who are the pools of 0:06:15.120 --> 0:06:17.640 owners of this dead and what does it do to 0:06:17.720 --> 0:06:20.480 them if they really have to take in the end 0:06:20.560 --> 0:06:26.080 sort of massive marks down markdowns on their holding. It's 0:06:26.080 --> 0:06:29.640 going to be very exciting to that play out because 0:06:30.400 --> 0:06:34.600 they're clearly, you know, one would suggest they're they're clearly 0:06:34.680 --> 0:06:38.160 going to be big losses that have to be born 0:06:39.160 --> 0:06:43.520 by someone, you know, some group of someone. There's always 0:06:43.600 --> 0:06:46.400 been a tug of war as to the allocation of 0:06:46.400 --> 0:06:50.880 those losses between the equity owner of party and their lender. 0:06:52.000 --> 0:06:55.160 It's a it's a it's an old kind of tradition 0:06:55.440 --> 0:06:59.920 in real estate when when things go well the property 0:07:00.360 --> 0:07:04.000 creates sufficient cash flow to pay and repay the lender, 0:07:04.360 --> 0:07:08.120 you know, when the loan tourers. But when things don't 0:07:08.160 --> 0:07:12.040 go well, the borrower calls a lender and says, we've 0:07:12.080 --> 0:07:14.520 got a problem. You know, instead of a kind of problems, 0:07:14.520 --> 0:07:16.960 we've got a problem. How are we going to fix it? 0:07:17.880 --> 0:07:19.640 Of course, the way it's supposed to be is the 0:07:19.680 --> 0:07:22.640 bob is supposed to lose everything because the lender has 0:07:22.760 --> 0:07:27.400 taken this safer position in lieu of upside. But again, 0:07:27.440 --> 0:07:31.200 as I go back to, because most lenders, even whole 0:07:31.240 --> 0:07:34.160 own lenders like banks, are just not set up to 0:07:34.240 --> 0:07:38.239 own property. There's been a long edition in real estate 0:07:38.720 --> 0:07:43.160 where when things don't go well, the lender recreates value 0:07:43.280 --> 0:07:47.160 or economic value because they don't have the will or 0:07:47.200 --> 0:07:51.480 the capacity to enforce their lean and take the borrower out. 0:07:51.960 --> 0:07:54.920 And so the lenders do lose money when they don't 0:07:54.920 --> 0:07:58.400 necessarily you wouldn't think they should because of the hierarchy 0:07:58.640 --> 0:08:02.360 of the capital structure. So how that all plays out 0:08:02.560 --> 0:08:06.960 will be very interesting to watch, But unquestionably there are 0:08:07.040 --> 0:08:11.320 losses in the system. I'm curious. So, you know, thinking 0:08:11.360 --> 0:08:14.760 back in two thousand two nine, that was truly a 0:08:14.880 --> 0:08:18.680 national prices and basically hit everywhere at the same time 0:08:18.840 --> 0:08:22.480 and arguably to the same severity this time. I mean, 0:08:22.600 --> 0:08:26.200 you know, I'm in New York and obviously people think 0:08:26.240 --> 0:08:27.920 it's going to be pretty bleak here for a while. 0:08:27.960 --> 0:08:30.480 But I was just in Austin, Texas for a while, 0:08:30.520 --> 0:08:32.600 and people this is booming and a lot of people 0:08:32.600 --> 0:08:35.600 are moving there. And so I'm curious how you see 0:08:35.679 --> 0:08:38.600 the sort of bifurcation of the economy where it's not 0:08:38.720 --> 0:08:41.880 just not necessarily a national recession or a national depression, 0:08:42.320 --> 0:08:45.880 but as simultaneous boom in one place, boom in some 0:08:46.000 --> 0:08:49.680 real estate market, boom in some office market, and crash 0:08:49.720 --> 0:08:54.840 another that that is a very accurate assessment of the 0:08:54.880 --> 0:08:59.280 way things are right now, which makes it very interesting 0:08:59.520 --> 0:09:02.320 in the center that there are definitely going to be 0:09:02.360 --> 0:09:07.040 winners and losers. Were in an impossible position and no 0:09:07.480 --> 0:09:09.760 one if you really predict exactly where things are. I 0:09:09.840 --> 0:09:13.400 have my opinions, but but I don't think the government 0:09:13.440 --> 0:09:18.040 can walk away because we're as close to anarchy as 0:09:18.080 --> 0:09:21.439 we've ever been in modern times. We're in a depression. 0:09:21.480 --> 0:09:23.000 So I'll tell you this, I think that we're in 0:09:23.040 --> 0:09:26.440 a depression like the nineteen thirties. But the difference between 0:09:26.480 --> 0:09:31.320 the nineties and now is the federal government's response. Right, 0:09:31.360 --> 0:09:35.720 in the nineteen thirties, there was no response, so nobody 0:09:35.800 --> 0:09:39.439 got helped. The banks were allowed to fail, everything was 0:09:39.480 --> 0:09:43.319 allowed to kind of go go under, and where there 0:09:43.320 --> 0:09:46.680 were breadlines and there was massive homelessness. Today you have 0:09:47.400 --> 0:09:51.360 massive government response, right, and so the massive government response 0:09:52.040 --> 0:09:55.559 is masking over some of the natural symptoms of the depression. 0:09:56.320 --> 0:10:01.040 And you know what, it's hard for someone subertarian leaning 0:10:01.080 --> 0:10:04.480 to say this, it's the only right choice. There is 0:10:04.520 --> 0:10:07.040 no other choice, and we're just going to have to 0:10:07.080 --> 0:10:09.760 get used to it. Those of us who are grew 0:10:09.840 --> 0:10:12.960 up lovers of the free market, we're just gonna have 0:10:13.040 --> 0:10:15.400 to suck it up and just say this is this 0:10:15.440 --> 0:10:17.360 is the new world that we're living and it's not 0:10:17.400 --> 0:10:22.280 going to change. And can't to just sort of describe 0:10:22.440 --> 0:10:25.840 the challenge. I mean, a, we've had this extraordinary government 0:10:25.920 --> 0:10:29.480 response so far. We'll see what further is going to come, 0:10:29.520 --> 0:10:31.280 but we also sort of describe the sort of sense 0:10:31.280 --> 0:10:34.920 of anarchy. Does that exacerbate it? The fact that different 0:10:34.920 --> 0:10:38.640 parts of the country are experiencing this moment, So differently. 0:10:39.080 --> 0:10:42.559 I think that what's likely to occur its rational. The 0:10:43.000 --> 0:10:48.520 rational things will occur, meaning investors, companies will go to 0:10:48.720 --> 0:10:55.000 places that they feel it can deliver things that benefit 0:10:55.120 --> 0:10:59.760 companies and the and their constituents, primarily their employees. Right, So, 0:11:00.040 --> 0:11:05.360 companies will move from places where perhaps physical safety is 0:11:05.400 --> 0:11:10.560 not as u not as certain, or fiscal imbalances create 0:11:10.600 --> 0:11:13.560 a need for higher taxation, and they're going to move 0:11:13.600 --> 0:11:17.199 to places where physical safety is perceived to be better 0:11:17.480 --> 0:11:23.040 and taxation lighter. And uh, that's true for employers, and 0:11:23.080 --> 0:11:26.840 it's true for the wealthiest of the communities who pay 0:11:26.840 --> 0:11:29.160 a lot of the taxes. As you know, New York 0:11:30.440 --> 0:11:33.200 its budgets paid for by one percent of the tax payer. 0:11:33.320 --> 0:11:37.800 So that creates this downward spiral it's very very hard 0:11:37.840 --> 0:11:41.960 to undo. And uh, and then a very bullish spiral 0:11:42.120 --> 0:11:46.120 for the kind of recipients of these movers and the 0:11:46.240 --> 0:11:49.880 states that people are coming to. How that ultimately plays out, 0:11:49.920 --> 0:11:53.040 because if you play it out to its logical conclusion, 0:11:53.520 --> 0:11:58.960 you're going to have dystopian cities around this country and 0:11:59.000 --> 0:12:02.480 it's going to be really, really weird, and the federal 0:12:02.520 --> 0:12:06.400 government is have to make a decision. I think about 0:12:07.000 --> 0:12:09.800 what is the United States? Right? I mean, there's there's 0:12:09.840 --> 0:12:12.679 some really big questions that really have never been asked 0:12:13.120 --> 0:12:16.640 for a couple hundred years in this country that will 0:12:16.679 --> 0:12:18.400 need to be asked if this plays out the way 0:12:18.400 --> 0:12:29.160 I think that was Joe Wisenthal in conversation with Ethan Penner. 0:12:29.880 --> 0:12:32.560 For the full interview, listen to the Odd Lots episode, 0:12:32.760 --> 0:12:36.959 available now on Apple Podcasts, Spotify, or wherever you listen. 0:12:37.920 --> 0:12:40.400 And that's it for our show today. For coverage of 0:12:40.400 --> 0:12:43.240 the outbreak from one and twenty bureaus around the world, 0:12:43.559 --> 0:12:48.160 visit Bloomberg dot com slash Coronavirus and if you like 0:12:48.280 --> 0:12:50.760 the show, please leave us a review and a rating 0:12:51.120 --> 0:12:54.680 on Apple Podcasts or Spotify. It's the best way to 0:12:54.720 --> 0:12:59.600 help more listeners find our global reporting. The Prognosis Daily 0:12:59.720 --> 0:13:04.559 edition is produced by Topher foreheads Jordan Gospore, Magnus Hendrickson, 0:13:04.760 --> 0:13:09.200 and me Laura Carlson. Today's main story was reported by 0:13:09.280 --> 0:13:13.960 Joe Wisenthal and Tracy Alloway. Original music by Leo Sedrin. 0:13:14.480 --> 0:13:19.280 Our editors are Francesca Levi and Rick Shine. Francesca Levi 0:13:19.559 --> 0:13:22.840 is Bloomberg's head of Podcasts. Thanks for listening.