COVID-19: Research Update IV


Will McIntosh, Ph.D
Global Head of Research

John Kirk, CAIA, CCIM
Senior Director, Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

Karen Martinus
Senior Associate, Research

Chenchao Zang
Senior Associate, Research

Jane Zheng
Associate, Research

April 27th, 2020

Here are our thoughts on the economy and financial markets as we reflect on the pandemic and its fallout:

What is the implied unemployment rate today? [1]

Over 4.4 million people filed claims for unemployment benefits last week (topping 26 million in the previous five weeks), which pushed the implied unemployment rate to around 20%. By some estimates, the rate could approach 30% later this year, surpassing the all-time high of 25% reached during the Great Depression. While the jobless claims remain on a historically unprecedented pace, at least the trajectory is trending in the right direction, as the number of requests has fallen for three consecutive weeks.

What are the implications of oil prices turning negative?

Global oil prices slid last Monday, highlighted by the May contract for West Texas Intermediate (WTI) crude trading in negative territory for the first time in history. The price for the May contract fell 306% in one day to -$37.63 per barrel. Many factors contributed to this historic event in which oil producers and futures traders were willing to pay someone else to take their oil. Still, the main issue is that there is a shortage of oil storage capacity, and COVID-19 has weakened demand for oil. For some producers, it was cheaper to pay someone to take the oil than to shut down wells and risk damaging them permanently. Additionally, many futures traders never intended to take delivery of the oil barrels, and they were caught in a sharp price drop, causing them to sell their contracts at a severe loss rather than finding a place to store the barrels. The following highlights some of the possible implications of the ongoing weakness in the oil patch:

  • Inflation Expectations: The drop in oil prices reinforces the notion that inflation will remain muted in the near term, despite the extraordinary increase in stimulus by policy officials. Headline CPI is not only on pace to turn negative in the coming months, but two-year inflation expectations remain negative as well. It appears that the public markets are beginning to price in the likelihood of deflation in the U.S.
  • Shale Bust: In 2019, the U.S. had become the largest producer of oil in the world, thanks mainly to the shale revolution. If major shale producers head toward bankruptcy, the U.S. will not only lose thousands of good-paying working-class jobs, but it could also temporarily lose its status as a swing producer in the global oil market. As such, the government may have an interest in extending a bailout package to the industry, if only to keep the infrastructure intact so that producers can resume business once the health crisis passes. It is also important to consider that while commercial enterprises control U.S. oil production, most of the rest of the world’s oil supply is sourced in countries that rely on oil revenue to run their government. Thus, countries, such as Saudi Arabia, Russia, and indeed Venezuela, could experience social unrest if oil prices remain suppressed for an extended period.
  • Energy Markets Woes: Energy markets will suffer a severe blow. Houston, for example, is the fourth largest city in the country, and about one-third of the economy is tied to the energy industry. From a commercial real estate (CRE) perspective, the market already had the second-highest office vacancy rate (16.7%) in the country, according to Costar. Thus, the uncertainty in the oil patch could lead to further economic deterioration in the metro area, particularly in those submarkets that are heavily, or almost exclusively, focused on demand from the oil sector.

Notably, WTI June contracts rebounded to just over $17 barrel as of last Friday. There is hope that prices will stabilize in the near term, given that OPEC agreed to cut oil production by 10 million barrels per day for two months, starting on May 1st. However, the underlying issue – weak demand for oil – will persist until the virus is under control and restrictions are eased.

What is the status of the Paycheck Protection Program?

Last week, Congress finally reached an agreement on an additional $320 billion for the small-business-oriented Paycheck Protection Program.[2] As you may recall, under the $2.2 trillion CARES Act,  approximately $350 billion was allocated to the program. Still, the Small Business Association (SBA) ran out of money 13 days after funding nearly 1.6 million applications.  The plan faced severe challenges during the first round of funding.  For starters, the SBA had never processed more than $20 billion a year in loan volume, and now it was attempting to process $350 billion in a matter of weeks. Additionally, an analysis of the loan recipients seemed to indicate favoritism toward larger small businesses with more resources. The firms that received loans were, on average, 4.5 times larger than those that did not.  The lack of oversight resulted in well-funded organizations like Shake Shack, Stanford, Ruth’s Chris, and Harvard receiving loans, though all agreed to return the funding after public pressure. Still, many of the businesses that were most impacted by the crisis did not receive loans before the funding ran out.

Congress has taken measures to correct some of the issues that occurred during the first round of funding, but small businesses face an uphill battle. Even if the SBA successfully provides loans to another 1.6 million applicants, it would only represent about 15% of the estimated small businesses that applied for emergency relief. Moreover, a National Federation of Independent Business survey showed that 50% of small companies could financially survive under the current shelter-in-place conditions for less than two months.  Thus, we suspect there will be calls for another round of funding for small businesses in the coming weeks.

Are state and local governments in need of a federal bailout?

Despite the National Governors Association pleading for $500 billion to help states replace lost revenue, aid for state and local governments was absent from the latest Congressional relief package. Meanwhile, last week, Fitch downgraded New Jersey’s debt, while Moody’s downgraded Illinois’s credit outlook, citing complications related to COVID-19. We believe these states are just the first of many that will experience similar credit downgrades. It does not appear that the aid requested by the National Governors Association will arrive anytime soon, which could make the current downturn worse or, at a minimum, slow the eventual recovery.

Are CRE investors ready to go on offense?

It is still way too early to know precisely where buying opportunities may present themselves, but there are signs that some market participants are positioning to go on offense. In early April, there were 939 CRE funds (a record high) raising capital across the globe, targeting $297 billion, according to Preqin. Indeed, many of these fundraising efforts were already in progress before the health crisis, but recently there has been an uptick in the number of new funds targeting distressed assets. Additionally, some funds, whose capital raising efforts were disrupted by the crisis, have revised their investment strategy to include buying opportunities that may result from COVID-19.  When combined with the healthy level of dry powder already on hand as of EOY 2019 ($330 billion), the appetite for distressed CRE assets will likely intensify over the next several quarters.

Notable Real Estate Updates

Multifamily:  The National Multifamily Housing Council (NMHC) found that 89% of apartment households made a full or partial rent payment by April 19, compared with 93% in April of last year. The NMHC’s rent payment tracker does not breakout collections by property quality, but anecdotal evidence suggests Class A assets, which are more reflective of our portfolio, captured an even higher percentage of rent payments in April. While many landlords were pleasantly surprised by the relatively healthy level of rent collections to date, the May rents could prove to be a test for the market.  A recent report from PYMNTS indicates 59% of U.S. households were living paycheck to paycheck when shelter-in-place orders began in March. Thus, it is reasonable to assume that rent collections could fall considerably in May, given that over 26 million Americans lost their jobs during the last five weeks.

Medical Office:  Health-care systems across the country have been overwhelmed by COVID-19 cases, and many of them are also under increasing pressure due to their financial situations as well. Many health institutions generate a significant portion of their revenue from elective procedures, most of which have been discontinued as hospitals have prioritized care for Coronavirus cases. Meanwhile, many of their investments have not recovered from the market slide in March, leaving them with few resources to offset the sharp decline in revenue. A recent report from Fundfire indicated that some might have to consider selling long-term investment assets (possibly including CRE properties) to stay afloat. Oxford Economics estimates that 1.5 million non-essential health-care workers will lose their jobs in April, a sign that the many hospital systems around the country will face severe revenue shortages in the coming months.

Retail:  A Neiman Marcus bankruptcy filing is imminent, according to recent reports. This filing would mark the first major retailer to succumb to the Coronavirus pandemic, but it will not be the last if CoStar’s most recent baseline projection comes to fruition. The forecast suggests 128 million square feet of retail space will go dark over the next five quarters through summer 2021, pushing vacancy levels to 5.7%, or 100 basis points higher than where they stand today. It should be noted that Neiman Marcus has, for some time, been burdened by high debt levels, and even before COVID-19, it had been rumored that the company could seek bankruptcy protection this year.

 Concluding Thoughts

The rate of change in the financial markets has slowed substantially since the initial shock in March, but the impact of COVID-19 is both widespread and ongoing. Despite the possibility of a second wave of the virus, governors have reached varying conclusions regarding when they should ease restrictions. Non-essential businesses were allowed to reopen last week in Georgia partially, while Virginia’s shelter-in-place order is not set to expire until June 10th. Meanwhile, the Federal Reserve continues to wade into unchartered territory; the central bank announced that it would lend directly to businesses for the first time in history, purchasing up to $750 billion of corporate bonds. Also, a meat shortage looms as 30% of the country’s hog-slaughter capacity has been taken offline due to the pandemic.  Indeed, these are unprecedented times. While we can certainly see the path to recovery, it could take at least another month before much of the country begins to reopen, and even then, the process will be gradual.  In the meantime, the systematic unwinding of the U.S. economy will continue to bring about new challenges that were once unimaginable.


[1] Implied unemployment rate uses initial unemployment filings as a proxy for where the U.S. unemployment rate is headed.

[2] Remarks by President Trump at a Signing Ceremony for H.R. 266, Paycheck Protection Program and Health Care Enhancement Act, April 24, 2020, White House,



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