- We Have a Situation
By David Grana
September 28, 2020
Recession? What recession? Everything is fine and chugging along, right? Speaking frankly, I really don’t know what to call our current predicament. And I wouldn’t blame even the most erudite of economists for not knowing what to call it either. What we’re living through is likely the Mike Sorrentino of economies. And by that, I am referring to the reality star’s moniker “The Situation”.
The Situation (the economic one, not the reality star) is a melange of scenarios, which combined, make it difficult to give a blanket statement about the national (and in some cases, local) economy. On one hand, many large East Coast cities are seeing historic growth in office and residential vacancies, while many Western cities, including our own, have seen soaring residential property demand and rising prices.
Reality TV personality Mike "The Situation" Sorrentino.
In that same breath, tech companies and online retailers have benefited greatly from the coronavirus economy, while travel and leisure is akin to a one legged man running a marathon. And if that doesn’t make your head spin, how about the disparity in unemployment rates between Nevada and neighboring Utah, which came in at 13.2% and 4.1%, respectively, for the month of August.
And it’s not just the aforementioned contrast between East Coast and Western residential markets that are experiencing a Situation. The multifamily space has one of its own as it struggles to contend with layers of eviction moratoriums from local and federal authorities. Industrial is having its own Situation, with demand levels through the roof for large distribution spaces, but with the uncertain future of consumer and business spending power putting that demand into question.
Manhattan real estate has been among the hardest hit since the coronavirus pandemic.
The Situation that’s brewing now, mostly in the retail and office space and creeping its way into some parts of the industrial market, are subleases. They’ve been kept off-market by brokers for the last few months since the “re-opening” of the economy, but they’re now going mainstream. This boom in subleases is giving many small businesses and start-ups that have been operating from home offices or temporary offices an opportunity to go prime time in a bonafide space with limited commitment and, in some cases, at a discounted rate. This Situation could well be why the office and retail space, at least in the Las Vegas market, has not seen the dramatic declines that many pundits, including yours truly, had projected at the beginning of the pandemic. The strength of this market, however, appears to be supported by the stimulus funds that these small businesses were able to acquire. This money is limited and there doesn’t appear to be a follow-up stimulus bill coming anytime between now and the November election. So how much more does the sublease market have before it runs out of steam? And when it does, will we start to see a decline in advertised lease rates? New tenants in non-sublease spaces are getting concessions such as TIs and free rent, which is already putting a squeeze on the effective lease rate. When will these rates (and possibly even lower ones) rear their heads into the open?
If we see further government stimulus for small businesses, we could potentially see a long road ahead for activity in the sublease space and even for traditional commercial leases. The consensus among economists and investors is that we need another stimulus bill, however, given the foregoing, it could exacerbate what already appears to be a false market. We’re already seeing this with equity markets, which have experienced their own struggles in the recent past, but which are still sanguine, thanks in large part to government stimulus.
The stock market has bounced right back since its March lows.
The other market which is seeing some early signs of turbulence is the Las Vegas Valley residential market. This is not to say that single family homes are in any way experiencing a major correction, but recent price reductions, especially in the higher-priced end of the market, appear to signal that buyers and sellers are establishing a new price equilibrium. SFRs have been the strongest segment of the Las Vegas real estate sector since the start of the pandemic, thanks in large part to a lack of inventory, as well as - you guessed it - government intervention. Stimulus played a role in it, but it was mortgage deferments that provided the greatest relief. It could be that sellers are a bit more bold now that they have the sense of security provided by deferment and are testing just how high they can price their property. In that same breath, buyers may have learned the lessons of 2008 and are starting to retrench in hopes of lower prices.
The Situation with commercial subleases and SFRs is unfolding against a backdrop of continued layoffs at resort properties, while our economic engine, The Strip, advertises hotel rooms that once commanded upwards of $250 a night for a mere fraction of that price. How much more growth these real estate sectors have in them if our economic core continues at its current sluggish pace and if further stimulus is not injected into the economy is the trillion dollar question. If The Strip doesn’t come back or Washington does not provide a lifeline, we may find ourselves in an altogether different Situation.
Vegas hotel rooms continue to be sold at massive discounts.
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