This week we hear from two new contributors – Steve Quazzo, Co-Founder & CEO, Pearlmark, and Teri Frankiewicz, Senior Vice President & COO, Crown Community Development.  We also continue to hear from Mary Ludgin, who has shared with us from Week 1 – we may need to do a “Ludgin Retrospective” in a few months.

Enjoy our Monday read over your morning coffee!
Cindy McSherry | Executive Director | ULI Chicago

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Tales From the Front Line | May 18, 2020

STEPHEN R. QUAZZO
Co-Founder & CEO | Pearlmark
Read Steve’s Bio

Not since my high school days as a former newspaper sports editor have I had an opportunity to pen a column. Back then my monthly column was entitled “On the Green” a sophomoric pun on our school color/nickname and a youthful optimism concerning my golf game.

And it’s that optimism that I want to tap into here. I’m old enough to have lived through – and remember vividly – all the major business calamities our country has faced over the last half century:

Year / Crisis / US Economy

• 1969 – Political assassinations, Kent State, civil unrest, Vietnam War (Recovered)
• 1974 – OPEC gas shortages (Recovered)
• 1982 – Runaway inflation, 20% interest rates (Recovered)
• 1990 – S&L, real estate crisis (Recovered)
• 2001 – Tech bubble bust and 9/11 terror attack (Recovered)
• 2008 – Great financial crisis (Recovered)
• 2020 – Global pandemic (???)

As an investor, I understand that past results do not guarantee future performance – but it’s still the best indicator we have. It is also well understood that commercial real estate is tied to our economic growth and, with 30 million unemployed Americans, things do look bleak for our industry at the moment. Yet I remain an optimist. Our federal government has provided a significant economic stimulus, our financial institutions are strong, our biomedical industry is closing in on a cure, and the American entrepreneurial spirit has not been extinguished.

With mass disruption comes rapid change – and pricing real estate values at the moment is extremely difficult. But history has shown that the first three years immediately following a crisis have been the best time to invest in property. Underwriting durable income streams, devising the right capital structure and protecting the downside will be critical to making sound real estate investments during the coming 12-18 months and weathering this storm. Our economic recovery is likely to be gradual (a “swoosh” and not a “V”) and it will differ by geography and product types, but long term I believe in the US economy.

In John Belushi’s stirring, rallying cry “Animal House” speech he opened with “Was it over when the Germans bombed Pearl Harbor?…”.  While Belushi may have had his facts a bit off, directionally he was spot on. The US economy will recover and so will real estate values. Hang in there.

MARY LUDGIN
Senior Managing Director & Director Global Investment Research | Heitman LLC
Read Mary’s Bio

I think about what I am going to write for this series throughout the week, with increasing earnestness as Friday approaches. By Friday morning, I am likely to try an opening sentence out loud.  The dog – my constant companion in this extended home stay – rarely takes notice of me talking to myself. He is more concerned about my running in place when my Fitbit prompts me to get moving.  This column is valuable real estate – space in an email that goes out to hundreds of ULI Chicago members. In thinking about what to write, I ask myself what do I know that I didn’t a week prior that might put this crisis in perspective? What I have learned this week relates to considerations as I contemplate trading my kitchen table for my spot in our office building in downtown Chicago.  In thinking about going back to the office, I am reading up on which elements of a day at the office carry the greatest risk. Not my walk to the el. It is the least-risky part according to what I read. Based on contact tracing of people who have contracted COVID-19, less than one percent got it while outside. My stop at the grocery store on the way home is not particularly risky if I wear a mask – retail accounts for only 3% of transmissions. Clutching the strap on the el is only slightly more risky than my time in the grocery store. Transmission from germs on surfaces accounts for only 6% of cases. It is really about my extended time in a space where I might inhale airborne germs. So, I will be masking up while on the el and in the office, washing my hand at every turn, using my skirt or sweater edge to open any doors that require hands or to punch elevator buttons, and staying much more distant than I would ordinarily.

How will the business of real estate investment get done? Travel is out for now, other than by car. Our clients have embraced Zoom as a means of catching up. Assessing new investment will take creativity. My team and I will be Zooming this week to discuss how to conduct due diligence in the COVID era. Google Earth will take on greater meaning. Virtual space tours will have increasing relevance. So will insights from trusted third parties in the markets where prospective investments are located. We will need to keep an eye out for instances where what we see is not the complete picture. I will share with my team my own folly in a lake house rental from early in the on-line era. The photos were accurate. The house was as beautiful in person as it was on the website. Moreover, it was on the lake. But the owner had neglected to mention the state highway that ran between the house and the lake. My mistake for not asking.

THERESA O. FRANKIEWICZ
Senior Vice President & Chief Operating Officer | Crown Community Development
Read Teri’s Bio

I must say it’s so nice not to be the cause of a Global Recession this time around.

We can leave that to a bizarre looking styrofoam ball dotted with red spikes. The “jewels of the crown” seen under a microscope (and hence the name coronavirus) is the last thing that any of us wish to adorn ourselves with, especially in the housing industry.

But for Housing, the question is: since we aren’t the cause this time (along with the associated flimsy bank underwriting standards, lack of regulatory controls on securitization of commercial and residential mortgages, etc.), could we be an actual POSITIVE influence on the GDP during these overall darker economic times?

I think the answer is a potential “Yes”.

Let’s try to build some perspective…

Housing entered this recession under vastly different circumstances than in 2008.

• Publicly traded Production builders possess their strongest Balance sheets in 20 years. Large bond debt payoff is limited over the next 24 months. The Publics have significant traditional credit capacity and are utilizing same. In fact both DR Horton and NVR succeeded in the bond markets over the last two weeks with $500M of 2.60% senior notes due 2025 and $600M of 3.00% senior notes due 2030 respectively. Well positioned long term!
• Vacant Developed Lot Inventory has been shrinking vs. growing as a result of a tighter regulatory environment and the Publics acting in a much more disciplined manner…and inventory continues to shrink.
• All major MSAs (Metropolitan Statistical Areas) were on track for outstanding YOY sales until the second week in March.
• Low mortgage rates continue.
• Fully documented mortgages are the norm.
• Unsold New Home Inventory was at healthy level at 331,000 across the U.S., representing a 5% decrease YOY. In fact levels have actually dropped per community as there HAS been continued demand for spec homes, but the Publics have slowed their land buying and construction to a crawl.
• Homeowners went into this with high home equity levels. Only 10.7% of homes have less than 20% equity.
• U.S. New Home Revenues were 45% below the prior peak and similar to 2000 with $265B in revs. We were not overbuilt. In fact the case can be made that SF Housing had not met replacement demand in many MSAs.

Perhaps next week we can explore where the path looks like its leading, although predictions are all over the board! Multi-Family…Yikes! Single Family…on the precipice of long needed growth.

*Hats off to John Burns Real Estate Consulting for many of these stats.

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