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Raub Report: On to the new, New Normal

May 1, 2020

We are still in the midst of the Covid-19 healthcare crisis, but it appears the worst of this first phase is over. Here in San Antonio, hospitalizations have dropped from 77 to 54 with only 3 on ventilators as of the end of April. So, San Antonio metro area has not been hit as hard as many other major cities. Only time will tell how the future will play out, depending on the development and research of cures and vaccines. However, the economic crisis, created suddenly by the shutdown across this country and much of the developed world, is still in its early stage. At this time, we are experiencing a structural shock that will have long lasting, but currently unknown effects. Mohammed El-Erian, noted economist, stated on Bloomberg TV that “we are on a very bumpy road toward an uncertain future to a new, ‘new normal’”.

…Crisis breed’s innovation 

One effect we have seen in full force this past month is that crisis breed’s innovation. For example, restaurants no longer have sit-down customers, but do have daily food deliveries, so many have turned into small grocery stores. One of our gaming store clients, Night Watch Games, has begun doing curbside delivery and has revamped and expanded their website to reach more customers and recapture 50% of their revenue even though their storefront is closed. Moreover, they are picking up market share from competitors who have just closed up entirely. Distilleries have converted to making hand sanitizer and manufacturers convert to face masks, gloves and face shields. Just as the Space Race in the 1960’s brought amazing scientific advances, so today, in a much more compressed time period, pharmaceutical companies are putting enormous resources, research and money into developing vaccines for Covid-19. Due to this compressed requirement for innovation, enormous advances in many other areas will undoubtedly be made. Everyone has had to get very lean and efficient fast. Luckily, Federal government has empowered State and Local officials to take appropriate actions. In the end, this will make us better at what we do, but it will be painful getting there.

“We are on a very bumpy road toward an uncertain future
to a new, ‘new normal’”

What will the effects be on commercial real estate? Will office users need less space because more works are tele-commuting? Or more space in order to increase distances between colleagues? Are co-working companies, like WeWork, dead? Will there be less traffic because of fewer commuters on the roads at rush hours? We have all seen the empty streets. Have you seen that pollution in China and L.A. is dramatically lower because of fewer cars on the road?

The Retail Apocalypse just got a lot worse. Restaurants are decimated with maybe 75% never coming back. Will those that do, prosper again due to the decrease in competition? Startups in the future will be very hard to do. Gyms, trainers, salons, etc. are really smashed. But if some close, is there more business for the survivors? Mom & Pops are working hard to make it through with likely only a slim cash cushion. Thus, thankful to Landlords for any rent relief. However, the big national tenants who have attorneys on staff to throw their weight around are dictating to the Landlords that they won’t pay. National brokerages are descending on Landlords for rent relief, seeing opportunity in crisis as they get paid on the % of rent they save the tenant. But Landlords must be really careful not to violate loan covenants leading to a default. Lenders do not want to foreclose as that is the solution of last resort since that may put them into trouble with the bank examiners. Hence, everyone is generally trying to work together through this difficult period. Amazon has grown immensely and become more important than ever, so industrial owners may come out looking good. Self-storage facilities are booming as bedrooms are cleaned out for home offices and kids come home from college. Apartment rents went from 95% collections to maybe 65% in April and may decrease further in May. Interest rates are unbelievably low but rent revenues are dropping so it’s hard to tell what property is really worth. However, I know that now brokers are seeing activity like the old days – just two months ago.

Finally, there will be a rebound and surge once society is reopened but consumers will remain very cautious for years to come. This is a scary episode and will mark us all for a generation to come. We will come back stronger, smarter, more innovative and more appreciative of the work we have. On to the new, New Normal!

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