3/25/2020 | By Calvin Schnure
Latest news on the coronavirus, the economy
News over the past week has been worse than expected, both in terms of spread of the virus and the economic impact of measures to control the pandemic. In particular, job losses appear to be spreading from the front-line sectors (hotels, restaurants, retail, airlines) to businesses in general, especially to small- and medium-sized businesses and among hourly workers whose jobs are not suitable for telecommuting.
The jobless claims report on Thursday 26 March at 8:30 a.m. will be an important benchmark for the extent of the labor market impact. In terms of scenarios, there is probably not much chance of a “bad” scenario, only “very bad” and “worse.” Anticipating a huge spike in jobless claims, it is becoming more likely that unemployment rates rise to 10% or higher in coming months.
The main question today is how long the phase of rapid growth of infection and the economic shutdowns necessary to contain it will last. Previously there was a plausible case that these would be measured in weeks. It appears increasingly likely that it will spill into months. (Note: the current debate in Washington about whether to “open the country by Easter” does not change this timeline, as a premature end to social distancing may in fact accelerate spread of the virus and prolong and deepen the economic impact.)
What this means for the economy, real estate and REITs
In normal times factors like operating performance and profitability are primary. Today, however, these measures are less important. What matters most is to what extent a company or a sector has the resources to be resilient through a crisis that may last longer than initially anticipated.
REITs are exposed to the crisis largely through the economic health of their tenants and their ability to make payments on their lease. Many REIT property sectors may gain some protection through their long-term leases with investment grade tenants. Nevertheless, the full magnitude of the financial impact is still unknown.
In terms of financial resources, the REIT sector overall entered this crisis with strong balance sheets and ample sources of liquidity.
- Leverage: Leverage ratios were at or near the lowest in more than two decades in 2019:Q4 (in some ways this is distant history today, but the financial conditions at the start of a crisis often play a large role in determining the ultimate outcome). (Charts and data on REIT leverage are available from the Nareit T-Tracker®)
- Liquid resources: Holdings of liquid assets (cash and securities) plus lines of credit of equity REITs overall were ten times the annual interest expense (see, REITS Prepared for Coronavirus with Cash and Lines of Credit).
These strong balance sheets and sources of liquidity may help REITs weather the rocky period ahead better than other sectors.