On Wednesday, March 25, 2020, Walker & Dunlop hosted our webcast, “Navigating the Markets” on financing and the CRE market.
This week, our CEO, Willy Walker, and his guest this week, Dr. Peter Linneman, shared their thoughts on today’s changing economic environment, discussed the impact of COVID-19, and provided an update on the U.S. Commercial Real Estate sector. They covered:
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Willy Walker is chairman and chief executive officer of Walker & Dunlop. Under Mr. Walker’s leadership, Walker & Dunlop has grown from a small, family-owned business to become one of the largest commercial real estate finance companies in the United States. Walker & Dunlop is listed on the New York Stock Exchange and in its first seven years as a public company has seen its shares appreciate 547%.
Peter Linneman is the founding principal of Linneman Associates, a leading real estate advisory firm. For 35 years, he was a leading member of Wharton's faculty, serving as the Albert Sussman Professor of Real Estate, Finance and Public Policy. For over 40 years, Dr. Peter Linneman's unique blend of scholarly rigor and practical business insight has won him accolades from around the world, including PREA's prestigious Graaskamp Award for Real Estate Research, Wharton's Zell-Lurie Real Estate Center's Lifetime Achievement Award, Realty Stock Magazine's Special Achievement Award, being named "One of the 25 Most Influential People in Real Estate" by Realtor Magazine and inclusion in The New York Observer's "100 Most Powerful People in New York Real Estate."
Peter Linneman (PL): The question is: what’s the price that society is willing to pay in terms of unemployment, lost income et cetera? I know we could solve all traffic deaths by just not letting people use motor vehicles, but society has decided we are willing to suffer more or less 1,000 deaths because of the benefits it brings to have motor vehicles. So, we found ways like seat belts and laws to help keep more people safe. It is not an exact analogy but every day we live with risk. A complete shut down cannot be the answer for very long.
WW: That’s why I bring up the testing issue – the only way I assume people would get back to any type of normalcy is if they have some kind of confidence that the people, they are interacting with, are not sick.
PL: It makes sense. There are other ways too. I think testing is important but there are some other, simpler ways too. This is coming off conversations I’ve had with other immunologists and I’ll just list off some examples. You want to go to work? You could say you have to be under the age of 65, you have to wear a mask, you have to get sprayed, you have to wear gloves, you have to be in an office that has to be disinfected thoroughly every day, et cetera. Again, I am just giving examples.
There are steps and if you don’t want to do these things then you don’t get to go to work. We have people in the essential sections that are doing these types of steps. Do you shut down people or sequester those who are in the 75-age range or have lung problems or have serious heart problems? Yes, I think that is very possible. But I do not think you can say everyone. You need to find a way, in an odd way, to get more people safely infected.
I’ll give a silly example: want to go to an NBA game? Great. You will get sprayed. Everyone including the attendees and the workers. Everyone will have to wear gloves. That will cost some money, so your tickets are going to be more expensive. You need to wear a mask. If you are wearing a mask there will be no beer sales and there will be no popcorn sales. The players will have to wear a mask. Some people will say they are not going to wear a mask, but they are getting paid 10 million dollars a year. They will wear a mask.
PL: Every day that goes by, it will become much more elongated. It’s hard to answer that, Willy, until you know how long it will go on. I would say three more weeks of lockdown, meaning 2-3 more quarters before it rebounds.
PL: If I were to bet, I would have to bet on some type of consensus of the medical, some type of belief on political climate. A whole lot of countries face identical challenges to us. I say by the end of the year the Dow will be 10% down from where it started, which would be notably up. Spreads are about uncertainty and about risk. We just don’t know. As a path is known, the uncertainty will recede a bit and that’s what has pushed things down a bit. It is going to take a while for confidence to be rebuilt. On the 10-year treasury it is going to be under 1.5 by year end.
PL: Yeah, I think that’s basically right. I think people will slowly get back into the market. It’s a lot easier to pick up a knife from the floor than to catch it while it’s falling. It’s better to get more certainty out there before you start investing again.
PL: No one knows. It could get a lot worse; it could get a lot better. I think a lot of us wouldn’t want to take the risk. You say by the time we see; it could be too late. But, if tomorrow we wake up and the last two weeks had never happened, and some people made a lot of money buying at the bottom. I would not feel like I missed out. Most people don’t need that. Most people are dealing with more existential problems like do I lay people off, do I pay my rent, et cetera. My general advice is cash is a good thing in times of uncertainty. Liquidity is a good thing during times of uncertainty. Assume your rental receipts will run low, assume that you will not get that construction opportunity, because if it doesn’t turn out you’ll live with it.
WW: We had a pretty large transaction recently; we had fifteen bidders and the fifteen went to eight and we picked a winner last week. The winner backed out of the deal last minute. The asset was trading at a 3.9 cap rate. You look at the public trader assets and they are all trading north of 6. Why would you take down an asset of 3.9 cap rate when the publicly traded assets have a cap rate north of 6? Multi still has liquidity.
PL: Hopefully we go through a period where we don’t have to go through price discovery. Hopefully the forbearance situation will avoid having a lot of price discovery. If you want to take advantage of the dislocation you would want to go to the market. You can actually make your bet there. On the private side, there will be little price discovery within the next 60 days.
There is an argument that all we have done is run a casino for the last couple of weeks on the stock market. It’s a gambling market for the last few weeks. It’s not an investment market.