Green Street: ‘We Are In A Recession Right Now’ – Bisnow

With the economy in flux and stock pricesdown across the board, the U.S. commercial real estate property outlook lookspretty grim, Green Street Advisorssaid in a webinar Tuesday.

Businesses have shut down, some restaurants are going to limited operations and many employees are working from home.REITshareholders are taking notice.

In the three weeks ending Monday, the S&P was down nearly 30% and REITs were down 35%, Green Street Advisors Managing Director of Strategic Research Peter Rothemundsaid during a conference call.

On Tuesday, the S&P and REITs were up slightly, but the wild market fluctuations in the past couple of weeksare atelltale sign of things to come, Rothemund said.

"The market is pretty freaked out about the spread of the coronavirus here in the U.S.," Rothemund said. "And it tells you that we are in a recession right now."

Fears about a recession, defined as two consecutive quarters of falling GDP, come as coronavirus, which causes COVID-19, continues to spread globally.

As of 8 p.m. EST Tuesday, there are more than 195,000 reported cases worldwide with 5,700 in the U.S., according to Johns Hopkins. In the U.S., there have beenmore than 100 deaths across 17 states and the numbers keep going up,Johns Hopkins reported.

In an effort to stop the spread of the virus, several states and cities have declared a state of emergency, asked businesses to close or limit service, and have halted people from gathering in large numbers.

In San Francisco, officials have ordered 7 millionresidents to shelter in place. In New York and Los Angeles, bars, restaurants, theaters and even major theme parks have been asked to close, which many have done willingly.Major sports leagues, which draw thousands of spectators on any given night, such as theNational Basketball Association, Major League Soccer, Major League Baseball and the National Football League, have suspended some of their season's operations.

The closures and limited operating hours havealso stoppedtourism and economic activity. Gaming is down and some hotels, especially in Las Vegas, have been forced to close.

On Monday, economists from the UCLA Anderson School of Management reported that the U.S. economy has entered a recession, ending the expansion that began in mid-2009.

Courtesy of Green Street Advisors

A slide showing REIT performance from February 2020 to March 2020 by Green Street Commercial Property Outlook 2020

UCLA economists forecastGDP growth in the first quarter of just 0.4%. GDP for the second quarter of the year is now forecast todecline by 6.5%, and by 1.9% for the third quarter.

"With the assumption of an end to the pandemic and repaired supply chains by this summer, the forecast predicts the resumption of normal activity in the fourth quarter of 2020 and a GDP growth rate of 4.0%," UCLA officials said in their report.

Rothemundlikened the NBA suspension of its season last week to D-Day and Armageddon.

"That was the bottom," Rothemund said. "Now, everything is shutting down. And when things shut down, economic activity is not coming to a complete halt, but in Q2 we're going to have a nasty negative GDP number. Q2 is probably going to be the bottom."

Analyzing the public market, Rothemund said he's surprised by the underperformance of REITs during this time. Since REIT earnings from rent and profits are not as sensitive during a downturn as the S&P 500, it usually performs better, Rothemund said.

But the past three weeks or so, as the coronavirus spread, REITs have performed worse than the S&P. Rothemund couldn't really explain why, but correlates the performance of REITs and the drop in share prices as an indication of lower commercial real estate property values, which aredown 25% from at least three weeks ago.

REITs focused on gaming, lodging and healthcare are down 35% during the same time period. Student housing, which some had considered recession-proof, is down 30%. Office, apartments, malls and industrial REITs are down 20%.

Things can change very quickly, he said, because the marketis fickle.

"Some of these moves make sense and some of these moves are overdone," he said. "It's like the market is on a death scare ... In times of stress like this, there's a lot of distressed selling going on. You need to use some of these signals with a grain of salt."

One thing that is clear isa continued slide in private market real estate values. Rothemund said he sees market values going down by as much as 5% to 10% six months from now.

"The decline will vary a lot by property type," he said. "It's possible industrial values don't go down. [Manufactured homes] are probably not going to go down. Storage might not go down. But a lot of other property types are going down and going down significantly."

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Green Street: 'We Are In A Recession Right Now' - Bisnow