With the public markets in turmoil, the breadth of the outbreak unknown and information coming from all different angles, we wanted to take the opportunity to have a conversation about what the potential impacts of the COVID-19 virus might be on commercial real estate.

While the personal impacts of this outbreak hit close to home here in Portland, OR, we understand the uncertainty this is causing for investors generally, and more specifically as it relates to their portfolios and potential investments in direct real estate investments.

The safety of our community always comes first, and please find the links to the CDC and WHO’s most current updates on the outbreak. Basic hygiene seems to be the best preventative measure at this point, so wash those hands and practice vigilance if experiencing any symptoms.

In this episode, Mitch Roschelle, Partner at PwC, was kind enough to spend an hour with us this morning discussing the macro impacts, the recent market swings and a property category specific outlook for each of the major investment classes.

We discuss the Adjustment Process as outlined in this great article by Dr. Peter Sandman, what economic factors to watch as this continues to unfold, and Mitch’s outlook on each of the main asset categories of commercial real estate investments.

We are definitely in the very early stages of this outbreak here in the US, and it remains to be seen what the ultimate outcome may be. Mitch provides commentary on how the long term, contractual nature of real estate cash flow should help insulate it from the volatility we are currently seeing in the equity markets and how volatility often leads to a flight to safety and stability – something that direct investments in income producing real estate tends to provide over the long term compared to its more liquid counterparts.

As always, please let us know your thoughts on this issue and if there are any specific topics you would like us to cover. We understand this is a developing scenario, so please note this podcast was recorded on the morning of March 3, 2020 and as we learn new information, what was discussed may become subject to new information.

Stay safe out there and we hope this episode helps illuminate the state of the market as it relates to COVID-19’s impact on your real estate investments.

**Less than an hour after we recorded this episode, it was announced that the Federal Reserve cut the target range for the Federal Funds Rate by 50bps as was discussed on the episode.**

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Transcript

Real Crowd – All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Adam Hooper – Hey, listeners, Adam here with a special episode of the podcast given the recent news and uncertainty surrounded the COVID-19 Virus. We’ve had a handful of requests from investors and listeners to provide an update on the topic and its potential impacts on the real estate asset class. We thought there’s no better guest than Mitch Roschelle, partner at PwC, to come back on and provide the latest on the macro-economy and the potential outlooks for each product category within the commercial real estate investment world. Be sure to check the show notes for important links where we’ll link out to the CDC’s latest information. We’ll have a link to the adjustment reaction that we talk about from Dr. Peter Sandman, we’ll have the Atlanta Fed in there. And also, again, we’re recording this on March 3rd. Information may change as it comes available, so please check back to the show notes for the most current and updated information. As always, if you have any comments, please send us a note to podcast@realcrowd.com. Let us know what you think. And with that, we’ll get to it. Alright, Mitch, thank you for joining us again here this morning. Great to have you back on the show. I wish it were maybe under slightly better circumstances, but we’re looking forward to kind of talking through what’s going with this COVID-19, what the kind of macro impacts are, and how that might impact the different commercial real estate asset classes. So thanks again for coming on today.

Mitch Roschelle – Always fun. And since I have a cold, be happy that we’re doing this 3000 miles apart and through electronics. So I’m not contagious.

Adam Hooper – No, not transmissible through the Internet. Again, this is a very hot topic. It’s a very concerning topic for a lot of people out there, both from the kind of personal impacts of what this disease might be, and then also from an investment perspective. We’ve seen a lot of volatility in the markets. I think a lot of people are concerned about what the kind of bigger economic impact of this outbreak might be. So why don’t we maybe kind of just background. And I know you’ve talked in the past a little bit about some of the other outbreaks you’ve seen and how that’s impacted economies. Why don’t we start there? How does this compare to maybe some of the SARS, or MERS, or some of the other outbreaks historically, and what has the impact been so far on the economy?

Mitch Roschelle – Thanks, and just for the audience’s benefit, I’m not a doctor and I don’t play one on TV or on podcast. But having said that, if you look at the data surrounding MERS and SARS, MERS wasn’t that long ago, and MERS took over 900 days to impact the first thousand patients. SARS which was a while ago took about 140-some-odd days to impact the first thousand patients. What’s interesting about COVID-19 is it took a very short period of time, less than 50 days to impact the first thousand patients. And I think that is the big issue. I think it’s the fact that it happened so quickly, and it happened when it happened. It came out of China so the information flow was less than ideal at the beginning. And it also happened as our equity markets were hitting highs, we’re in the election cycle in the US, and I’m giving the US form of this thing, and trying to explain why it’s created so much uncertainty so quickly. So what’s interesting is normally there’s a tremendous amount of information, and investors and the general public can kind of get the drip, drip, drip of that, and begin to start making decisions, but we saw a very fast-moving outbreak. The word death in the headline never good, and then we saw the contagion spread, and this I’m talking about the non-economic contagion. We saw the contagion spread, and I think what has spooked the global economy is if you look at this really sort of in the abstract, China’s economy is already slowing, maybe not recessionary and mostly COVID-19 aside, maybe not recessionary, but the rate of change,

Mitch Roschelle – the rate of growth is clearly slowing. China’s biggest trading partner that depends on China for its trade is Germany. And most people don’t realize this, but Germany’s trade, exports are roughly 35% of their GDP. Their biggest trading partner for German exports is China. Germany’s economy is already fragile. We’ve seen some negative GDP growth coming out of Germany. We have negative interest rates in Germany. So the notion that the economic contagion could spread to the continent, to the EU, I think started to get people’s attention. So that’s sort of a macro-economic story. But if you look at it from a perhaps microeconomic story, sorry to make you bounce around freshman year in college, it may conjure up some bad memories for the audience, but if you look at it from a micro-economic story, if you’re a manufacturer of something and you rely upon a global supply chain, I think people started to become aware of the importance of China in the global supply chain more than they thought. You know you buy something online, and it’s “Made in China,” that’s no surprise. But you realize that an American car assembled in an American factory relies very heavily on component parts, obviously a car is assembled a lot parts, and many of those parts or parts of parts are made in China. So the steering wheel components may have electronics in it that are part of a board that is made in China. So I think that what the audience needs to understand and maybe they do already is that the interconnectivity of the global supply chain is a very delicate balance, and when you shut down factories

Mitch Roschelle – for enormous periods of time. We’re not talking about a power outage that shuts down a factory somewhere in the world for a couple days, we’re talking about factories that have been shuttered for a protracted period of time, weeks, if not a month, and don’t forget COVID-19’s outbreak became apparent to the world largely because it was apparent to China, and I’ll leave aside how long China knew and how long they told the world. But when they suspended Lunar New Year travel, you’re talking about a country with 1.3 billion people, and 200 to 300 million people are on the move, roughly the population of the United States is in transit during the celebration of Lunar New Year. And they suspended Lunar New Year celebration, basically you can’t travel, and that’s the biggest period of consumption in China, because what happens is when everybody is on the move they’re spending money, and many of their employers shut down for the week during that period so they can accommodate travel, and that was a blow to Chinese economy. So you have the factory shutdown for Lunar Year, the factory is not reopening again. Wuhan’s population is enormous, so I think all these stories came out and people started thinking, “Oh my gosh, this 10-plus year closing in an 11-year economic expansion in the United States is now in jeopardy.” and that’s when I think the big, red panic button started to get pressed.

Adam Hooper – And we’re recording this on March 3rd. I think that we saw last week with the public market’s biggest weekly loss I think in history, right?

Mitch Roschelle – And more importantly than that, it was the fastest correction, so more than 10% correction, not bear market which would be 20%, quickest correction after a high in the history of the market. So let’s not forget just a short two weeks prior the market hit an all-time high.

Adam Hooper – And so…

Mitch Roschelle – That’s not a peak to a trough, but that’s a peak to a massive selloff.

Adam Hooper – Pretty massive selloff, and so I think that’s what’s caused a lot of this uncertainty. And any time you introduce uncertainty, it’s going to cause some reaction there. So we saw them kind of recover first part of this week. What is the word kind of from the Fed on how this might affect public markets, or are companies kind of revising their forecasting because of this virus? What is the push behind this?

Mitch Roschelle – Those are great questions, Adam/Tyler.

Adam Hooper – That was Adam. Tyler wrote them, I ask them.

Mitch Roschelle – There you go. So then I was right, I gave both of you guys credit. So let’s take that in parts. The Fed is monitoring this very, very closely. The Fed has committed to being data dependent, and the Fed does not have in its mandate, there’s the word I was looking for, does not have in its mandate propping up US public equity markets. Let’s remember, full employment, moderating inflation, that is the dual mandate of the Fed, and the Fed, let’s not forget, is by definition independent. So they’re monitoring it closely. What they’re worried about, I believe, is the wealth effect that the consumer may feel has been diminished as a result of public equity markets falling and seeming to be more volatile. We haven’t seen true volatility in quite a while and, boy, did we ever see volatility in a quick period of time. So I think they’re worried about consumer behavior throughout the rest of the year. I think they’re also looking at business investment, so one of the things that the Fed tries to do to stimulate employment is to incentivize business to invest. Business investment yields employment, generally, and one of way they do that is with monetary policy by lowering interest rates. The Fed has done absolutely nothing so far, and I don’t mean that as a criticism, I’m just stating fact, they’ve done nothing to lower interest rates. And we saw early this week, so today is Tuesday as we record this, we saw overnight between Sunday and Monday, we saw the 10-year Treasury almost break through 1%. Today it was at 1.03, it rallied back up a little bit, and the yield picked up a little bit.

Mitch Roschelle – But, boy, it looked like it was heading south, that has nothing to do with an action of the Fed. What I think that was doing was that was the bond markets anticipating that the short end of the Treasury curve going down in the form of Fed stimulus. I believe right now the markets are betting on 100% that there’ll be a 50-basis point or half a percentage point reduction by the Fed in the Fed’s funds rate, the target rate, when they meet in March. There has been no policy statement delivered on that. There may be whispers, there may be rumors, but there’s nothing official. I believe the G7 has met the beginning part of this week. I believe there’s coordinated conversations between central banks around the world. The Bank of Japan has indicated that they are willing to be accommodative. I don’t know how they can be accommodative. They’re running out of weapons, because they’re interest rates are already negative. Maybe printing money is the way that they stimulate their economy. But I think it’s likely that rates will be lowered. But let’s talk about that for a second. If the anticipation of the Fed’s action has forced the Treasury curve down, and rates from the short-end of the curve to the 30-year part of the curve have all come down, then we already think theoretically had that stimulus. It’s already there. Now, that could unwind if the Fed doesn’t act. But the fact of the matter, that stimulus is already there.

Adam Hooper – It’s already priced in.

Mitch Roschelle – Right, it’s already priced in. So does that change consumer behavior? Does that change business behavior? The second half of your question and, boy, I was listening, was what does this mean to business investment, that’s the thing that I’m worried about. I’m worried about IT spend that companies were anticipating making in 2021 and whether they back off on IT spend, and I’ll tell you why I said IT spend in a second. Human capital spend, do they stop that? We are a service economy; the United States is a service economy, and it’s not only a service economy but it’s a service economy that’s dependent upon the consumer, meaning people. So what’s interesting is services that are delivered in our economy to not just the US but to the rest of the world are done on the backs of people, and those people make money, and those people spend money, and that creates this virtuous cycle, that is our economy. Businesses have not been spending from a capital investment perspective at the pace that the Fed may like, and may not be spending in capital investment at a rate that’s consistent with historical norms during an economic expansion. The problem is the Fed’s measurement doesn’t really take into account how spend has shifted over time. So they are still in many respects using some of the same metrics going back to the ’50s, because the Fed wants to and economists want to track all of this stuff on a historical basis. But back in the ’50s when businesses invested they invested in machinery. Now, business invest in two things. They invest in technology and they invest in people.

Mitch Roschelle – So what I’m worried about, and I’m not a worrier, so maybe I’m waving the caution flag just a little bit, is do businesses look at the way this calendar year started and moderate their plans for investment in hiring or technology spend ’cause that’s where businesses are spending throughout the rest of the year. And I think the month that we’re in, March, is going to be the pivotal month. If it feels as though business is back to normal or as usual, I think businesses are going to proceed as originally planned. But if they have any headline indication that somehow their business is slowing, I think businesses may pump the brakes a little bit, and stop spending and that’s the thing that could be troublesome for our economy.

Adam Hooper – And as listeners out there, how do they or we or all of us, how do we track that? I mean, it sounds like you think this month of March is going to be pretty pivotal. But what are some of the metrics or news stories or resources to be able to kind of follow along with how that spending may or may not be adjusted?

Mitch Roschelle – I’m going to say all of the above to an open-ended question, which is I think everybody in decision-making around evaluating of the answer to your question, and the hypothetical or the hypothesis rather, excuse me, that I just threw out there is going to answer that question through their own two eyes. So if you yourself are you’re listening to this podcast, and you are a leasing broker, you’re an architect, you’re an engineer, you are a finance person, I’m trying to touch everybody who’s listening right now, and I’m leaving out a bunch, you can fill in the gaps, you’re going to just answer that question your own, and then extrapolate your own experience to the way you view the economy. So if you’re leasing space, and let’s say you’re leasing retail space. I was just talking to a retail leasing person before I called you guys, so I’m going to use that. I was talking to a mortgage broker this morning on the train platform, and I said, “How is your business?” The way they answer that question is going to be the way they evaluate that themselves. And if they feel like they sent out eight proposals and they normally get four back, and this time they only got two back, they’re going to say, “Uh-oh,” so that’s the problem. And let’s remember this about our economy and from a job creation, it’s not big business that create the jobs in this country. Small businesses create five times more jobs than big businesses. So companies with a thousand employees or less create five times more jobs than companies with 5000 employees or more.

Mitch Roschelle – Did I say 5000, I said 1000 employees. So a thousand employees or less, five times more jobs than a thousand employees or more, lest I confuse the audience. So it’s really small business that’s the job creation engine and small businesses by definition don’t have as much wiggle room, so if that small business is a engineering firm, and they’re fearful that they may lose their next project, what are they going to do, stop hiring. My advice to the audience, if I were to offer some gratuitous advice, is don’t look at it through your own lens. Talk to a lot of people, because if you fail to make that investment that you were planning to make in the first place, ask yourself why were you making that investment, and that investment is probably in human capital most likely. Why were you making that investment? Why, ’cause we’re in an incredibly tight labor market, and if I don’t have the people, I can’t grow. You are cutting yourself off at the knees, if you don’t make that investment, if this in fact ends up being something that’s short-lived.

Adam Hooper – That personalization, and as we were talking before recording, we’re here in Portland, which is now the epicenter of Oregon’s outbreak. And so just researching this kind of typical reaction to a crisis, there’s Dr. Peter Sandman, and we’ll put a link in the show notes. He talks about this adjustment reaction process, which is fascinating to me where the first reaction to a crisis like this is to pause, and just kind of take stock of what’s going on, then you become hyper-vigilant where it’s reading every news article, doing every bit of research you can, trying to figure out what this all means. You then personalize it, which I think is what you’re talking about where if this happens to me, how am I going to react, what is that impact on my life, and then you take those precautions, and so I think we’re in this kind of crisis response stage that this process seems like it’ll work out, just kind of basic psychology where we’re in that kind of pause moment right now, I think, and some are maybe in the hyper-vigilant state. They’re trying to learn as much as they possibly can about this. I think your advice about not keeping your view just entirely personal, again, that’s why we’re having you on and we do the show is to try to get more exposure, to get more insights into that, so maybe where are some sources that people can look outside of just maybe their close network or just their own personal decisions to get a better feel for that? How do we get that more macro picture of where those decisions are being made, or how those things are changing?

Mitch Roschelle – What I would do is I would spend time talking to as many people as you can in the business world. If there was ever a phenomenal networking opportunity, it’s in times of uncertainty. And you know what’s interesting, you guys are awesome and have had me on several times to discuss emerging trends in real estate, which we publish jointly with ULI. I love that report not exclusively for its content but because what it forces me to do is get out there, and in the process of doing the research talk to as many people as possible to just get as many insights, because that’s the foundation of the report. And then as we roll out the report I talk to a ton of people. I’m actually sort of done with this cycle, and we haven’t started all over again. But I’m using the same discipline around collecting as much information as I can to understand what could be the economic impact of COVID-19, and so I work it into every conversation, almost to the point where it’s an obsession. So I think my advice is talk to the folks that are in your ecosystem, and then try to consume as much media as you possibly can from reliable sources. I’m most cautioning my children on the stories that they throw out there, and I have to remind them that it’s garbage, many of these news sources, but cable news is not a bad place to go, business networks not a bad place to go. Here’s the one thing that I would just remind everybody, we’re also in the midst of an election cycle, and we’re in the midst of an election cycle in an increasingly politicized and polarized world.

Mitch Roschelle – And when I say world I think that phenomena exists elsewhere in the world and it’s just not unique to us. You have to try to separate the facts from the politics. And there’s been a politicization of this COVID-19 thing, and I would just caution the audience stay away from, politics are fine and I spend a lot of time talking about that as well, but stay away from the politicized rhetoric around this, and just focus on facts. Leave the medical facts to the medical professionals. But the business implications, I think that’s in your wheelhouse, look at it in your own ecosystem and beyond. And by the way, if you’re part of networks like ULI, NAIOP, Real Estate Lenders Association, ICSC, talk to people outside of your immediate network, and see how it’s going for other people. I think at the end of the day this isn’t going to be the economic catastrophe that people are expecting. About three weeks ago, I’m on Fox Business Network most Mondays, and I was in the green room talking to a guest during a break, and I said, ’cause the market, the Dow Futures were down 600 that morning before the open, and I said, “I really feel a though this is a selloff in search of a headline.” and this is before, guys, we knew as much about COVID-19 as we do. It didn’t have a name at the time, I think it was just called novel coronavirus. And I said, “It was a sell-off in search of a headline.” because the markets felt pretty, pretty, fairly valued. They were “priced for perfection.” And the market found a story just to sell off.

Mitch Roschelle – That tends to happen but just remember the real estate asset class is a long-lived asset class, and I know you guys want to unpack the property types, I’m happy to do it, but it’s a long-lived asset class. It’s income that is contractual in nature. And I can share with you guys, I think I maybe have in the past, if you look at historical returns on real estate through the right lens, they outperform stocks and bonds, and I think investors fundamentally know that. And market participants in real estate fundamentally know that, and in times of uncertainty real estate is the place to be. Yesterday, obviously interest rate sensitivity, but real estate performed really, really well in the stock market. Largely because of the anticipation of the cost of capital is coming down. But the fact of the matter is real estate is many case the place to be. Does that mean that tenants may be reluctant to sign that lease because of uncertainty? That can tend to happen, but from an investment perspective, if there’s an asset class that weathers all storms, I think real estate tends to.

Adam Hooper – And so a couple things to unpack there. Again, if you said the Fed anticipated maybe a 50 basis point reduction in March, Treasury dropping, cost of debt therefore is going to be coming down substantially. We’ve seen it already in the home loan market. I’m assuming we’re going to see that similar in the commercial real estate loan world. Any anticipation on what that might be in terms of kind of cost of capital decrease?

Mitch Roschelle – It’s hard to tell because I think at the end of the day all real cost of capital is a function of the Treasury curve, and yield expectations on equity. What we didn’t see last week, and I would’ve thought we would’ve seen it was widening of credit spreads, but the market I tried to throw down a cough drop when you asked me the question. What the market hasn’t seen yet is any kinds of default on high-yield debt. Those are the kinds of things that tend to impact the pricing of debt and equity. But if there’s a wall of capital that is chasing safety and security, then I think it finds it’s way to real estate, and that would serve to ultimately lower the cost of capital, ’cause there could be more capital than real supply of things for that capital to invest in. And I may have said this on your program before, so if I did, and you’re bored by it, please don’t fast-forward.

Adam Hooper – You never bore us, Mitch.

Mitch Roschelle – So if you go back to literally biblical times and you look at the way wealth has been accumulated on the planet, I’ll argue that there’s only two ways that wealth has been accumulated on the planet throughout all of history. One way is precious metals and the other way is real estate or property. Let me take that precious metals basket for a second. Any security, currency, metal, Bitcoin, whatever, any asset that a trade can be settled in today sits in the precious metals basket. And then everything that is property and we don’t have to define what that is is real estate. Two things happen in times of uncertainty, and we saw this in the last week. Within the precious metals basket, within the trading asset basket, there’s a flight to safety, a flight to quality. You see gold being purchased. You see people rotating out of stocks and rotating into bonds. You see Treasury securities of sovereign nations with great credit, so where the benchmark, seeing a massive inflow of capital. You see our currency going up in value, because foreign investors are buying US Treasuries, which means they need to buy US dollars to do that, that’s what we see. But one one talks about the other thing, that investors tend to rotate out of the precious metals basket, the trading asset basket, into property in times of uncertainty. And accumulating and preserving wealth through real estate is literally the oldest game in town or on earth in terms of wealth preservation. So guess what, there are investors around the planet right now looking at US dollar-denominated,

Mitch Roschelle – highly-tenanted trophy assets, saying maybe it’s time to buy that now. The MBAs out there are putting it in Excel or ARGUS and saying, “Wait a second, the US dollar is like at an all-time high, we’re buying this.” But you know what, we’ll go back to what I said a few minutes ago. If you focus on it as being a long-lived asset, and you realize that you’re holding it for a generation or more, minor fluctuations in currency don’t matter.

Adam Hooper – And I think that’s one of the benefits that we see, again, in times of uncertainty is the longer term nature. Again, you said those are contractual obligations to pay that rent. Not to say that real estate values haven’t fluctuated maybe with what’s going on here, but that smoothing effect is definitely there from a portfolio perspective, where the value of real estate doesn’t necessarily change overnight. If you have a tenant paying rent, whether it’s multi-family or an office or industrial, they’re still going to be paying rent likely, unless again…

Mitch Roschelle – So let’s jump to property types for a second, ’cause you just said multifamily, and let me pounce on that, if you guys don’t mind.

Adam Hooper – Sure.

Mitch Roschelle – We have fundamentally in our country excess demand for housing than we have creation of new supply. This is not, I’m not breaking news here. That fundamental isn’t changing. People aren’t right now saying, “You know what? I really like my parent’s basement.” If you’re Gen Z, Gen Z is now entering the housing market. They’re graduating from college, which means they’re by definition moving out of their parents house, statistically, which means we formed a household, statistically. Do you think Gen Z is saying, “You know what, the generation before us, Millennials, it was big joke on cable news that they lived in their parent’s basement. We want to do the same thing.” No, they want their slice of the American Dream, which is to move out and find a place of their own, even if there’s 10 people sharing an apartment, everybody wants that. So we haven’t created new supply, we’re still creating demand, so the fundamentals are there, they haven’t changed, so why wouldn’t you say multi-family, single-family still makes sense? Could you see housing starts? I don’t think it’s going to show up in the March housing starts number in a week and half. Could it show up in the April housing starts number? Perhaps, but just think about the engine that is a home builder. They’re not all of the sudden turning everything off, because they’re going into homebuying season. Now, really the housing start right now does nothing for satisfying supply of homebuying season, but you know what when people buying homes they’re not just buying something

Mitch Roschelle – that they can move into for the immediate future, they’re also buying something that they can move into a year later, knowing that’s when it’ll get delivered. So I think that the fundamentals for the housing market, whether it be single-family, and I think we can talk about supply constraints, but single-family or multi-family, I think they make absolute sense.

Adam Hooper – So not much of an impact from this.

Mitch Roschelle – Not much of an impact. Office, office is a place where could a manager of a business say, “I don’t know about this economy slowing down and I’m not going to sign that lease.” maybe. But guess what, if that lease is up, they need to do one of two things. They need to either renew in place or move. Do you think the landlord is going to say, “We’re worried about recession, you can go month to month?” No.

Adam Hooper – No.

Mitch Roschelle – When that’s not happening, so if that lease is actually up I think that there’s going to be a lease transaction. Maybe they stay as opposed to moving. Maybe the move was anticipating taking an extra floor in the existing building. There’s a chance that they don’t do that, but have we meaningfully added to supply nationally of new office stock? Not really. We’ve done it in Austin and Nashville, and the Pacific Northwest where you guys are, but we haven’t nationally, meaningfully. Now I say that as I sit at the corner of 42nd and Madison in New York City, and looking at a million-and-a-half-square-foot, new building that’s coming out of the ground. But we’re not meaningfully, nationally adding to supply by historical trend standards. So office still fundamentally makes sense. The only thing that would change that dynamic is if there was a massive washout of demand. And quite honestly I think it would take a protracted recession, something on the order of the global financial crisis to cause a massive washout in demand. Industrial, forget about it. If anything, people are going to shop online more as a result. We still need, we haven’t solved our last mile conundrum in this country. The question is does this accelerate the displacement of retail in America, and I don’t know that I could make that call at this stage. But I’ll say this, a common flu in this country is very dangerous to the most fragile amongst us: children, the elderly, and people with compromised immune systems. And the common flu is far more deadly than anything statistically we’ve observed

Mitch Roschelle – early in the cycle here with COVID-19, that’s fact. In real estate, the most fragile amongst us is retail. So if anything’s more vulnerable in times of uncertainty and in times of moderated economic slowing, it’s arguably retail. So I think if anybody felt it, retail would feel it the most. The one food group I didn’t touch, which I do think has some vulnerability is lodging. There’s no question every company sending out an email suspending non-essential travel, and I think that that happens in two times. It happens in the case of risks of global health pandemics. And it happens in times of economic uncertainty where companies are trying to control people just flying around for the sake of flying around, that’s a lever that any business can pull to control spending very, very quickly. So why is it being done? Quite honestly, probably for both reasons. When non-essential travel gets cut, people are staying at hotels less, and who pays the most in hotel bills, business, they pay more than the retail consumer does. So I think the lodging industry is going to feel a drop in occupancy, and they’ll respond by dropping rates a little bit, ’cause they do tend to moderate rent. So RevPAR, revenue per available room, which is the metric for the lodging industry, we’ll probably see a RevPAR impact in the very near-term.

Adam Hooper – And obviously within each of those major asset classes there is different categories. Looking at hospitality, you’ve got kind of more coastal destination travel versus the kind of Midwest, drive-by business travel. Do you see within those asset classes differentiators between that, or do you think that everything in multi-family very fundamental, far more demand than we’re seeing supply. Office you said is kind of could go either way, probably not going to be much of a change, more dependent on the kind of bigger macro decisions that companies are making. I don’t know how that maybe impacts down to like the WeWork, kind of co-working spaces versus bigger floor place, kind of central business district leasing. Maybe that puts more of an importance on flexibility of office space than some of the kind of more traditional uses. I don’t know if you have any thoughts on that.

Mitch Roschelle – Yeah. It’s a great question. But I think it’s too hard to tell, because if companies want to grow but aren’t willing to commit to traditional occupancy plans, then don’t the shared space folks benefit because they are a stopgap measure? We need a floor, but we’re not willing to sign the lease for a floor. Let’s stick them in the local shared space operator, whether it be WeWork or whoever it is. But we need a conference room for a meeting, we don’t have one, let’s borrow one from the hotel around the corner. So I think that the system is pretty efficient in terms of all of those things. It’s whack-a-mole, when one problem shows up, another opportunity arises, maybe it’s reverse whack-a-mole. I think the efficiency of the market is going to survive this. Back to your specific hotel question, it’s interesting. You can make the knee-jerk reaction, and say, “You know who gets the worst, the airport hotels.” Airport hotels get crushed, because no one is flying around. And hopefully you don’t stop listening because I was saying that. Someone telling you, “Gee, you listened to the rest of my hypothesis.” But the flip side of the coins is when airlines start offering tremendous discounts to get people on planes. They don’t want to put a plane up, burn fuel, and have nobody on it. So there’s one other industry, because of the pricing efficiency that they have online, they can push demand right to their plane by targeting customers with pricing. Well, that’s going to get people back to airports, and when you get people back to airports,

Mitch Roschelle – people start staying at airport hotels. And what if you wanted to take a trip that you just really couldn’t afford because the flight was ridiculous, and let’s say it was to go to Australia and you live on the East Coast, and you got this amazing deal, you fly from New York to Los Angeles, and then the next day you fly from Los Angeles to Sydney, what do you need to do that night? Either sleep in the gate or stay at an airport hotel. Those are customers that wouldn’t have been there if it wasn’t for the airlines pushing that incentive. So I think you need to look at these highly nuanced situations. Someone could say, “Oh travel is off, the car rental industry is going to be destroyed.” Well, maybe not, because people may be driving places as opposed to flying places, and they may rent cars ’cause they don’t want to put their miles on their lease car. And the company may pay for you to rent the car as opposed to, there’s all of these things that happen which are the unintended consequence of something else not happening. So I think the airline industry will have an impact. They’ll figure out a way to maybe adjust price but keep demand there. And I think the lodging industry will likely do the same, ’cause they know their customers, loyalty matters to their customers. I’m already getting it. I fly largely on two airlines, and I got targeted emails from both of them like crazy in the last 48 hours, trying to get me to buy airline tickets. And you know what I got, which is really scary? I’m always checking out different pricing and routes

Mitch Roschelle – for meetings that may happen. I may go to ULI’s meeting in Asia in May to speak. I don’t know if I’m going to go. I’m having back and forth around that meeting. So I looked at JFK-Narita, JFK-Tokyo on a couple of apps. I’ve already gotten emails from both of those airlines, saying, “Are you still thinking of going to Japan?” So they’re going to get aggressive. We call it self-help. I think that the travel-oriented asset classes, the transient asset classes in real estate, will survive this, but I’ll just go back to the one that I keep an eye on is retail.

Adam Hooper – And now as you mention there’s so many interdependencies here with those kind of follow-on effects that maybe aren’t apparent at first. Are there any metrics or things that you’re looking at or watching or keeping an eye on that listeners can maybe pay attention to, to see how some of those things might unfold?

Mitch Roschelle – I’m a huge fan of economic data. One morning on Fox Business we were having a conversation with Jon Hilsenrath, who’s the chief economics editor for the Wall Street Journal, and he’s also a Fox News and Business regular, and we were talking about the economic data, and he said tongue in cheek, “I don’t know who wakes up in the morning, and asks themself what first quarter GDP is going to be.” And I responded, “We do.” What I would do is I’d pay close attention to the very data that the Fed is paying attention to, whether it be Purchasing Matters Index, or Institute for Supply Management, PMIs and ISMs, the different Fed offices, the Fed Beige Book. Friday is a jobs report. Probably too soon to tell. One of my favorite things to look at is the Atlanta Fed has something called GDPNow. And if you to Atlanta Fed, google Atlanta Fed GDPNow, not if you’re driving people, but when you get home, or not even a red light, when you’re safely parked in a parking lot, that’s my PSA for your people.

Adam Hooper – I appreciate that.

Mitch Roschelle – In any event, go to GDPNow, the Atlanta Fed has a model that takes into account every economic data point that’s out there. Yesterday, they revised up their first quarter GDP estimate to 2.7%. Now, the GDPNow number is highly volatile, swings around a lot, and it can be one jobs report that’s a blowout jobs report, and their GDP estimate spikes to 4.5%, and it never comes in anywhere near that. But just keep an eye on those kinds of things. I think that…

Adam Hooper – And more so looking at trends versus the nominal numbers, right?

Mitch Roschelle – Correct, and the commentary around it. And if I were to give a plug to my friends in the Wall Street Journal, I think there’s no better objective reporting of the US economy in a way that anybody can really read it in understanding than the Wall Street Journal. And if you subscribe and you read the online version, there’s actually a tab on the top called Economy, and just click it and it’s all the articles that fall into the category of economy. They have some phenomenal writers there, but they really do a great job of unpacking it. And I think it’s very fact based, it’s not very political. I would argue that some of the publications have tended to politicize some of their economic reporting. I do not believe in the body of the journal that they politicize it. And I think you just monitor that stuff, and you’ll realize that the underlying strength of the US economy is there. But there are other geopolitical and probably macroeconomic headwinds that we have. I’ll give you an example. No one realizes this. Do you know how many elements of pharmaceuticals, components of pharmaceutical products, have been outsourced to China, and we could have a supply shortage of pharmaceutical products in the United States? It’s phenomenal, who knew that? So there are these kinds of things that are out there, that’ll grab headlines, they’ll be incredibly sensational, but you got to ask yourself other than public health considerations surrounding that, has that changed the fundamental strength of the US economy? And my knee-jerk answer to that is no, unless we see people incapable of going to work,

Mitch Roschelle – because God forbid they’re debilitated because they don’t have their meds, that is awful. I do not want to see that. But if that’s not happening, how does that impact job performance, productivity? I don’t think it does and I could be wrong. I did get a B in macroeconomics. Let me just tell the audience that.

Adam Hooper – Well, I’m glad we had you on then.

Mitch Roschelle – I mean, your last guest got a C, so I’m a massive upgrade.

Adam Hooper – Relatively, you’re doing pretty good.

Mitch Roschelle – I have a slide, by the way, when I speak, and it’s a picture of me interviewing Art Laffer on television, and at the top of the slide it says, “Who would think a dude who got a B in macro-econ would be discussing economics with Art Laffer.” But since the day I took macroeconomics in 1980 I’ve been a student of the topic, and I’m fascinated by it. And I really encourage everybody in real estate to equally be a student of macroeconomics. And I don’t think there’s a better textbook out there quite honestly than the Wall Street Journal. And you asked that at the top of the show where to look. I’d say that and I’m not getting paid to say that. I just think it’s good advice for everybody.

Adam Hooper – Perfect, and as always, we’ll give you the opportunity to plug your very, very active Twitter account, that’s also a pretty good spot for some of this.

Mitch Roschelle – Yes, you guys are awesome. And by the way, I don’t when we spoke last if you knew this, but I used to shamelessly plug my Twitter account really out of sheer narcissism. There was no other reason, no business reason for it, and one morning the president of the United States saw fit to retweet me. Did I tell you guys that story?

Adam Hooper – Yeah, we got that one.

Mitch Roschelle – So now I’m not shamelessly looking for Twitter followers, however I do tweet about macroeconomics all the time. As I mentioned, I’m a fan of it, a student of it, and it’s a life of continual learning there. So it’s Mitch_Roschelle, and it’s R-O-S, like Sam, C-H-E-L-L-E. And I have an adorable, 11-and-a-half-year-old golden retriever, and I tweet about him all the time. And he does need Twitter followers, so you can also follow Charlie. I’ll tag him in my bio.

Adam Hooper – There you go.

Mitch Roschelle – But certainly follow me on Twitter if you’re looking for information, and when I put charts up that I pilfer with permission from the Wall Street Journal, I try to give an indication where you can find it there, too, so I appreciate the follows.

Adam Hooper – Very good, well, Mitch, again, really appreciate you coming on, a quick, time-sensitive issue here. Thank you for sharing those insights. We’ll add links in the show notes. We’ll put that GDPNow, we’ll put that adjustment reaction process in there, and some other links down there. So, listeners, be sure to check the show notes for those links. And, Mitch, as always, great having you back on, and I hope you have a wonderful afternoon, and recover from that cold.

Mitch Roschelle – Adam and Tyler, always fun, and next time I’m finding a way to get to the Pacific Northwest, and I’m going to do this in your studio. How is that?

Adam Hooper – Sounds like a plan, we’ll hold you to it.

Mitch Roschelle – Alright, guys, you will.

Adam Hooper – Thanks, Mitch.