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Landmark Links May 22nd – Harder Than It Looks

One Big Thing

As the economy begins to reopen, there is still going to be a substantial amount of distress in two real estate property segments in particular: retail and hospitality.  In the retail space, the pandemic has greatly accelerated a years-long decline due mostly to a combination of competition from ecommerce, over-supply and too much leverage.  The hospitality space was far healthier when the pandemic hit but demand has now been damaged and will likely be substantially lower until there is a vaccine or treatment.

At the same time, residential real estate has been a bright spot, but is still suffering from a crisis of low supply.  The obvious solution in a truly efficient real estate market would be to convert underutilized retail and hospitality properties to badly-needed housing uses.  Unfortunately, we are about as far from efficient as one could get when it comes to land use.

The first issue is the type of structure.  Can an existing hospitality or retail building be converted into housing of some sort as an adaptive re-use project?  Sometimes the answer is yes, oftentimes no and even when it can the process is often so daunting that it makes more sense to bulldoze the existing structure and start over with something purpose-built.  Either way, the physical development is typically challenging, expensive and time consuming.

That being said, the biggest issue isn’t physical development and construction but rather politics in general and municipal finances in particular.  In a bit of a twist of irony, hospitality and retail properties are the biggest moneymakers for cities thanks to occupancy and local sales taxes (this absolutely plays a role in the retail oversupply story, but that’s another issue for another day).  As you can imagine, cities are very reluctant to allow a developer to re-zone a potential cash cow like an under-performing or even vacant retail center or hotel to something that generates little revenue but consumes municipal services like housing.  To be clear, there is absolutely an opportunity here but its not for the faint of heart.  When something seems this obvious, there is a reason that it isn’t being done in greater scale.

What I’m Reading

Against the Grain: Oaktree’s Howard Marks on great investments:

“Every great investment begins in discomfort. If everyone else didn’t hate the investments, they wouldn’t be cheap.”

The Big Bet: Lenders are allowing borrowers to miss payments on credit cards and auto loans with the hope that they will be able to catch up on payments when the economy starts back up again.

Netflix and Chill: A new survey found that 70% of consumers would now rather watch newly released movies at home than in a theater.  The trend was headed in this direction for years but COVID could push it over the edge.  If it holds up, there are a lot of movie theaters that will need to be repurposed.

Inverse: The housing market, household finances and the banking system were the epicenters of the last crisis while the oil industry and urban real estate were areas of strength.  So far its been the exact opposite this time around.

Winners and Losers: Firms like Macy’s and Boeing are selling their warehouses which are getting bought up by Amazon. and other eCommerce giants.

Falling Behind: The national mortgage delinquency rate increased by the most in recorded history in April when loans in forbearance are included.

Chart of the Day

Financial conditions are easing at the quickest rate in history, opening a massive gap between financing conditions and economic activity.  Financial tightening was a leading indicator of the plunge in economic activity back in March.

Source: Bloomberg

Will corporate debt in the post-COVID era follow a similar path to household debt after the Great Recession?

Source: BofA Merrill Lynch Global Research

WTF

Take That: A woman in China sent her ex-boyfriend 1,000 kg of onions in order to “make him cry.”  Speaking as someone who ate onions like apples as a kid (the ladies loved it), this actually sounds amazing.

Jackpot: A Virginia family reportedly stumbled upon nearly $1MM in cash left in a bag in the middle of a road.  They promptly called the local police who are investigating where it came from.  Idiots.

Boomer FIGHT: Four old men got in a paint fight that included throwing of cans at a Home Depot because Florida.  There is video in the link and it is awesome.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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