On today’s show we’re talking about the fallout from last week’s stock market correction. Investors hate uncertainty. Whenever there is uncertainty investors go running for the hills. This is why investors finally woke up to the earnings warnings that have been resounding through the back alleys of Wall Street in the past 10 days.
Is the drop in corporate earnings going to represent a V shaped blip, or will it be more of a U shaped business impact? Will this viral outbreak last until the Spring and then disappear much like SARS did in 2003? Or can we expect this virus to circulate around the globe multiple times including mutations of the strain?
Will the supply chain disruption result in a weak Q1 and a roaring Q2?
Will the drop in travel result in airline and travel industry bankruptcies?
As real estate investors it’s easy to be complacent and say that real estate is unaffected.
Tenants still need a place to live. They’re still going to pay their rent and we haven’t seen any job losses being announced on a large scale.
At least not yet.
We keep hearing that investors have a lot of cash sitting on the sidelines. In the past week, we’ve had the markets fall by about 12%.
The losses total 6 trillion dollars in just five trading sessions. How many day traders were undisciplined and didn’t close out their positions at the end of the day? How many day traders will have their margin accounts called in?
How many investors left their cash in the market and were waiting on the right real estate transaction before cashing out of the market and using their gain to invest in a qualified opportunity zone investment?
Exactly who was impacted by the loss of wealth? The bottom 50% of the population in terms of net worth are likely not to be impacted at all by the stock market correction. They have very little in the way of holdings. Where they are at risk depends on the where the pension plans had funds invested.
If you’ve been listening to this show for a while, you’ll know that I’ve been advocating getting out of the stock market for some time. The valuations haven’t made any sense. But here’s where its going to start to hurt for real estate investors.
If your traditional sources of capital have been impacted by the stock market correction, they may be feeling conservative at the moment. They may be saying that it’s not a good time to make investments and would rather wait a few months to see what is going to happen in the market before making any commitments. Remember investors hate uncertainty.
They may be asking questions like “How will the coronavirus outbreak impact real estate markets?” It’s a difficult question to answer. How many people will wait for the quarantine orders to subside before making a decision to buy a larger home, or invest in a multi-family apartment complex?
You may find that investors who had committed funds to a syndication all of a sudden pull back and decide to wait it out. I know of at least three investors where this has happened.
The good news for real estate investors is that the yield on the 10 year treasury has dropped even further in the past week. Interest rates on permanent financing is index to the 10 year treasury yield which means it could be an excellent time to rate lock into permanent financing or refinance into a lower interest rate.
There’s no question that the rates of infection are going to multiply. I took an hour this weekend and created a mathematical model for the spread of the corona virus. If the current rates of infection remain unchanged and quarantines prove ineffective, we can expect that much of the global population will be impacted within the next 90 days.
If you’re raising capital in today’s uncertain environment, it would be a good idea to communicate with your investors and ensure they’re still on board.