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       Commentary Today


These commentaries are more expanded issues facing the country today 

Crap...  I am any a loss for words at the moment....  

Are we loosing this country?

Not Even FDR Could Pack the Supreme Court

By:  Noah Feldman                                            September 25, 2020                     Bloomberg

JSO's Perspective  -  July 12, 2020

Good Grief its July already!  We are supposed to be done with all of this!


In the words of Claudio Del Vecchio, who lead Brooks Brothers to file for bankruptcy on June 8, 2020, “retailing has been changing a lot in the last four to five years, and we were in the process of adapting to that new environment. When coronavirus came, there was really no way to sustain things.”  For companies such as Men’s Warehouse, Brooks Brothers, Tailored Brands (who just skipped a bond payment on July 2, 2020), etc., Corporate America had turned in the work place increasingly casual, and fewer men were buying suits.  Once people started sheltering at home, they turned to even more casual attire, such as sweatpants.


As people begin to head back to the office, it isn’t known whether they will return to a more formal way of dressing.  Brooks Brothers, and one has to suspect all of the other suppliers of men’s and women’s formalwear, saw their sales a formal business wear account for only approximately 20% of total sales.  Even 10 years ago the vast majority of people in the white-collar work force dressed in business formal wear.


The Houston-based company Tailored Brands  (Men’s Warehouse and Joseph A. Bank) began reopening some stores in May of 2020, but reported comparable-store sales declines of 65% Men’s Wearhouse outlets as of June 5. Comparable-store sales were off even more—78%—at reopened Jos. A. Bank outlets.

From a retailing Point of view the chart above highlights the extreme stress that all of the stores are under.  It also explains the exit Neiman Marcus, JC Penny, J crew, etc. for the stage.  But there was already a long list of retailers that did not make it including such names as Sears, Toys “R” Us, RadioShack and most recently Barneys of New York, etc.  In 2020 the list included above who have filed for bankruptcy is fairly extensive. Not all will disappear from Main Street, but most will have a substantially smaller footprint across the United States once day we organize.

Not alone has retailing change, but what the American public is buying is also different.  Sweatshirt for suits ,T-shirts for blouses etc.  Both men and women since the pandemic started have quickly shifted and there is absolutely no guarantee that there would be any shift back in the near or the medium-term future.


Retail is under stress, small to medium-size shopping centers that in the past have being able to maintain a strong tenant retailing presents, are reeling under the current lack of rental payments, partial rental payments, bankruptcies, the treat of bankruptcy and rising vacancies.  


Clearly, property values are taking a weathering downward adjustment and there is no doubt that banks, private investors to REITs have a very keen eye on the future and their investments.  At this stage the long term social economic and health impacts of COVID-19 are still unknown.  It is clear that not just the local but the global response to this pandemic has fundamentally change to realities for retailers and more importantly for the owners of these shopping centers.  


There are the users that are all to visible such as retailers, senior living facilities, office buildings, cinemas, etc. that have been having a desperate run since February of this year.  But the airlines have faired very badly as have restaurants and bars. United Airline plan to layoff one third of its workforce of 98,000 employees.  But also sports leagues, a cannabis company and even an archdiocese plagued by sex-abuse allegations. These are some of the more than 110 companies that declared bankruptcy in the U.S. this year and blamed Covid-19 in part for their demise.


KPMG in their “Realities of Retailing in a COIVID-19 World” have five truisms: 


1.    Managing demand fluctuations

In `red zone' markets where the virus is spreading, virtually every retail outlet - except grocery stores and pharmacies - has shut their doors. Even those markets not under quarantine orders have seen a precarious drop off in physical footfall in retail outlets and malls.

Yet while some retailers are seeing demand fall away and customers shift channels, others are facing unprecedented spikes in demand. Grocery retailers, in particular, are dealing with significant out-of-stock situations on many key products as consumers hoover up supplies perceived to be essential. The ability to predict and manage demand has never been more important.

2.    Shoring up the cash reserves

Retailers, particularly those with physical footprints, are rethinking their current cash positions and trying to assess how they will continue to pay the bills should the downturn in demand continue for a prolonged period of time. In particular, retailers should be taking a close look at their current and predicted liquidity profile and assessing any changes in their working capital dynamics or short term cash forecasts.

Given the industry's high dependency on cash to pay for stock, real estate and - importantly - staff, many retailers are now also talking with policy makers to see how they can influence and take advantage of any hardship funds, rental renegotiations and rate holidays.

Many retailers are also now reviewing their overall financial stability under a variety of different scenarios and, if required, engaging with lenders to refinance loans or amend financial covenants that may be impacted.

3.    Protecting the people

The COVID-19 virus has already led to a number of workplace shut-downs and quarantines. Retailers must have a plan that ensures the safety of the employees while also trying to maintain business as usual activities. Beyond simply creating a crisis communications plan, retailers should be thinking about how they will manage their workforce under various different scenarios.

China's experience shows how innovative companies might address these challenges; during the height of the outbreak there, grocery operators temporarily hired thousands of restaurant employees who were idle due to restaurant closure to help meet spikes in demand. Other companies have been moving employees around the organization to fill gaps and relieve overworked departments.

4.    Thinking about the longer-term supply challenges

While grocery retailers are trying to manage significant supply challenges due to consumer panic buying and resulting stock-outs, most non-food retailers are not yet feeling the full impact of supply disruptions; drops in demand coupled with long lead-times and inventory warehousing means that short-term supply is generally not a problem.

But, as the situation evolves, we expect to see significant variations in the magnitude and timing of supply chain disruptions across geographies and subsectors. Retailers should be talking to their key suppliers to assess their risks, identify any indirect exposures and create contingency plans.

5.    Talking to customers

Retailers should also be thinking about the impact these massive changes will have on the customer and the customer relationship. How will you maintain trust in your brand and your products and services? How will you reset expectations for today? And how will you recover the customer experience in the future?

In this environment, shoring up the customer relationship is just as important as shoring up the bottom line.


Before the coronavirus affected the entire United States, America’s most valuable malls were driving billions of dollars in sales annually, contributing hundreds of millions of dollars to local tax coffers. 

Now, nobody knows what those numbers are going to look like coming out of the Covid-19 crisis — other than definitely being a lot less.  No one also knows when this may occur.  Some of the Southern states such as Florida, South Carolina, Texas, Arizona to mention a few may have to go back to phase 1 closure. Unfortunately there is political interference and less scientific adherence.  There has never been a coherent federal plan.  The Federal Reserve stated out of right, that if States do not get a handle on the virus and reduced the number of contaminations plus increasing number of testing, the effect on not just the local economies but the national economies could be devastating.  Indeed as reported in Washington Post – “if there were still hopes of a “V-shaped” comeback from the novel coronavirus shut down, this past week (second week of July 2020) should have put an end to them. The pandemic shock, which economists once assumed would be only a temporary business interruption, appears instead to be settling into a traditional, self-perpetuating recession.  When states and cities began closing most businesses in March, the idea was to smother the virus and buy time for the medical system to adapt. Jared Kushner, the president’s son-in-law and a senior White House adviser, spoke of hopes “that by July the country’s really rocking again.” ”


In addition to this many shoppers simply are hesitant if not hostile two returning to enclosed shopping centers.  Apple is re-shutting dozens of stores it had reopened and Microsoft is planning to go 100% online and close all of its brick and mortar stores. 


The Consequences for mall owners is that their unpaid rents mean that malls are not able to pay their bills including their mortgages Tennessee-based CBL and Associates have skipped two interest payments. Mall of America has skipped two interest payments.  CBL & Associates Properties, Inc. is a self-managed, self-administered, integrated real estate investment trust. The Company owns, develops, acquires, leases, manages and operates regional shopping malls, open-air and mixed-use centers, outlet centers, associated centers, community centers and office properties. The Company's portfolio is comprised of approximately 108 properties totaling over 68.2 million square feet across 26 states and are primarily in the southeastern and Midwestern United States. Its properties include over 68 enclosed, outlet and open-air retail centers and over nine properties managed for third parties.  This in not a small market operator of retail centers.


“The COVID-19 pandemic continues to have a profound economic impact across the country,” Steve Guggenmos, vice president of research and modeling at Freddie Mac, said in a statement to CoStar News. “At present, all states are in some stage of reopening.  Nevertheless, unemployment claims remain high and there is much uncertainty about an economic recovery and — for many tenants and borrowers — concerns around how to make their next rent or loan payment.”  


The two government-sponsored enterprises have now offered this forbearance on about $12.2 billion in loans. Fannie Mae added more than 40 loans to its total in June, while Freddie Mac added more than 175.


Senior housing loans led the increase. The largest single loan in forbearance now is tied to a $1 billion portfolio of senior facilities owned by an affiliate of Blackstone Group, the New York-based private equity giant.  Senior housing has been related to almost 40% of U.S. coronavirus deaths through the end of May, according to the Kaiser Family Foundation, a national nonprofit group focused on healthcare.  


The National Real Estate Investor on June 8th 2020 referring new research by Reonomy ( highlighted the obvious industries to have been hit very hard by the pandemic (retail, restaurant, travel and energy sectors), but other industries have also seen an oversized fallout from COVID. Those states where there are very high rental rates, tenants are simply struggling to keep up the payments and when the governments PPP begins to expire these harder hit markets may ultimately experience valuation decreases in the low double digits, or somewhere the valuation loss will be between 10% and 15%.


Forbes has seven predictions for how COVID-19 will change retail in the future.  These include:


  1. A diversified supply chain

  2. Acceleration of e-commerce

  3. Boost of contactless payments

  4. Reevaluation of re-commerce

  5. Reimagined store pickup

  6. Big gets bigger and

  7. Technology will be interwoven with commerce


1)      According to Euromonitor International China’s annual economic output has multiplied more than sevenfold, reaching $14.3 trillion in 2019.  The coronavirus outbreak closed factories all over China, leading to a record low in manufacturing out-put and ultimately, broke the supply chain to the rest of the world.  This just make it very difficult for manufacturers to obtain components and retailers to obtain finished products. Such challenges underscored the world’s dependence on China, showing the need for greater diversification.  


2)      As of 2019, 13% of goods were bought online globally, up from 6% in 2014, according to Euromonitor International. The coronavirus pandemic has accelerated e-commerce adoption, as many experiment with or even become reliant on the online channel while in isolation.  The perfect example has to be grocery shopping.


3)      Given safety concerns, consumers are opting for contactless card and mobile payments over handling cash or touching POS terminal keypads. As of late March, 22% of connected consumers globally used a digital wallet to buy at least one product in a physical store.  But it’s not just consumers, retailers need to be in a position to accept payment electronically such as apple pay, Vinmo, etc.


4) Economic, technological and environmental factors combined to make the idea of resale, or second hand shopping, mainstream in recent years. A variety of online resale players, such as Depop and Thred Up, launched alongside venerable resale names, such as e-Bay.  While the potential economic fallout from the pandemic would typically accelerate the resale trend, the psychological fears from continuously disinfecting and washing hands could make consumers think twice about wearing secondhand clothing. Those same fears could impact clothing rental services where consumers borrow apparel or accessories for a fee.   


5)      Retailers that rely on in-person interactions could face a prolonged dip in store traffic as public officials continue to need to promote social distancing to control the virus.  As such, the boom in online shopping will continue, putting greater spotlight on last-mile delivery options. Curbside pickup could become a mainstay option.  More retailers could even move to a drive-through model to better facilitate in-store collection.  Lost of course is any chance of upselling.  But a sales is a sale!


6)      Online behemoths Amazon and Alibaba controlled one-third of the e-commerce market globally in 2019, according to Euromonitor International. Store closures during the pandemic extended their dominance. Amazon, for example, hired 175,000 new employees as consumer spending on Amazon jumped 35%, according to Facteus. These titans as well as thre many other smaller players such as Walmart, will come out of the pandemic even stronger, permanently reshaping the retail landscape and driving a winner-take-all race that was already in motion.  


7)      Lastly, technology has been front and center during the outbreak. The trajectory of technologies, such as cloud computing, will accelerate, making businesses more flexible. Robotics, in particular, are seeing exponential growth to reduce human-to-human interaction. For example, Chinese delivery app Meituan Dianping started using autonomous vehicles to deliver grocery orders to customers in Beijing in February. IKEA even acquired an augmented reality startup that enables consumers to visualize new home furnishings in their living spaces from the comfort of their homes.  This type of widespread use of technology is still some years away, but assuming the virus is still lingering around in 2022, the push will become even more urgent.


In this short article we have covered a lot of ground but developed no solid prediction on the overall affect on property values.  In essence this will have to be completed one property at a time.  Assessors around the country will be hoping that there is simply no value change to any building.  But the movie house chain AMC might have very solid ground to dispute this even after they raised a further $500 dollars.  


There is a lot of hurry up and wait when it comes to future valuations.  But there are few people not worried about what the future may hold for everyone.

JSO's Perspective  -  June 11, 2020


There is some good news along with new worthy items that we maybe wallpapering over to avoid deeper issues looming into the near and more distant future.  According to the Washington Post (June 10, 2020) the total number of individuals receiving unemployment benefits is almost 21-million people.  This is down from a height of 44-million individuals who had applied for benefits at some stage during the pandemic.  It was always agreed that once the country started to reopen, many employees would be asked to come back to work, but not all.  When the OEMs (major car manufacturers, Caterpillar, etc.) for example, restarted production not alone would their direct employees slipped off the rolls but the myriad of companies that supply parts to the OEMs would also ramp up their production and their employment.  Let’s call these hard jobs.  However, on the other side of the coin, as restaurants and retail try to reopen in a post-pandemic world, restrictions, etc., have meant that they have not been able to bring back as many workers as they once employed.  Soft jobs have taken a beating.  While there has been loosing of the PPP requirements as to its use, a significant minority of restaurants and especially retailers will not be around by February 2021.   They will simply have run out of money.


Mr. Powell, the head of the Federal Reserve on Wednesday offered a grim assessment of how quickly the US economy is likely to recover from this recession. As expected by most people, (Maybe not 1600 Pennsylvania Avenue) he simply made it official the millions of people could remain out of work for an extended period of time.  Addressing the elephant in the room, Mr. Powell did not suggest rapid economic growth, but indeed pivoted to the great uncertainty about the future unknowns regarding the coronavirus, and how much people will feel comfortable resuming the previous day-to-day activities.  With this in mind he stated that there maybe a significant chunk of workers (into the millions) who might never get their old jobs back.  The central bank is estimated at the unemployment rate by years end will hover around 9.3%.  They also predicted economic contraction of between 5% and 10% for the year.  The Feds also announced they will continue purchasing about $80 billion worth of treasuries and $40 billion dollars worth of mortgage backed securities per month.  Finally Mr. Powell predicted no increase the interest rate until at least 2022. While this is a significant commitment by the central bank into stabilizing the economy into the future, it also when extend this is unprecedented run low interest rates starting in December 2008.  Surely a question on everyone’s mind, especially after the $3 trillion deficit spending spree, is inflation or more to the point potential hyperinflation around the corner?  The first or second quarter of 2021 may yield some clues as to what may lie in the future for us as a nation.


Starbucks has a total of 18,067-stores in North America.  Of these 55% are corporate owned and managed.  The coffee chain is planning to shutter at least 600 stores in the next few months.  Without being too callous, brokers selling these triple net leases at an exorbitantly low capitalization rates are in for a serious shake-up.  Starbucks is all about business.  When a location does not produce, it’s onto the next one.  The pandemic has simply allowed them to accelerate their transformation where needed.  While they have been surviving from window sales, they have reported to the SEC that revenue for the current quarter declined by $3 billion.  


The trade group National Multi-family Housing Council highlighted that crack are beginning to appear in apartment rental payments. Class C apartments that are often home to more blue color and service type workers, or those who cannot work from home, had close to a 10% default rate.  Class A apartments on the other hand was half that number.  These properties or home to those who can work from home and still are employed.


The coronavirus has taken a terrible toll on long-term senior housing. The Kaiser Family Foundation reported on May 28, 2020 that 39 States had reported almost 40,000 deaths.  At the time that was almost 40% of all deaths nationwide (at that time) due to the virus.  So not alone is occupancy down but costs are significantly up as they struggle to manage the affects of the virus.  The irony here is, these properties always operated on significantly tight margins and now moving forward, just as with the unemployment market, will potential new tenants feel safe moving back into these facilities?  How is this going to effect value, and how is this going affect real capitalization rates.  


The word “Real” and capitalization rates is an issue moving forward got we as a valuation and property group need to deal with. REITs have been snapping up property over the last 10 years creating based on revenue capitalization rates that in the real marketplace and sustainable.  These sales and therefore capitalization rates are akin to investment value not to be mistaken with market value.  There will be more on this and the future.

Where is banking going?

The savings and loan crisis of the 1980s and 1990s saw the failure of more than 700 savings and loan associations.  There is no need to rehash the many short-comings of the financial industry but it did give rise to Resolution Trust Corporation and a slew of new regulations.


The Great Recession of 2008-09 saw what many people believed was a enduring response to the disaster by the federal government and many financial institutions.  Through TARP, TALF, HAMP, and a range of other initiatives, financial markets and many institutions were flooded with liquidity in a variety of ways, providing time for markets to normalize and values to stabilize, which they did.  There was in many instances a meet-me-halfway approach with lenders and borrowers creating sensible solutions to troubled loans in a very difficult environment.  Other instances there was simply no hope.  The property was lost.  This is not to say that many banks failed.  They did.  There were almost 500 bank failures between 2008 and 2013 costing the FDIC $73-billion.  For the most part it was a liquidity issue.


COVID-19 reminds us that each downturn is different in important aspects.  Under the current and continuing circumstances, the pandemic impacts almost all business and financial communities in an extraordinary way.  There is wide spread stress on existing loans and there is a potential for this to get a lot worse.  The first response (maybe the only response available to lending institutions) has been measured and to date tolerant, recognizing that every sector of the economy is under the same pandemic pressure.


As for the commercial real estate sector today, the response by financial institutions to the flood of borrower requests for accommodations has dimensions that fit with today’s unique (maybe never before experienced even in the 1930s) circumstances.  We understand that real estate is in itself a unique animal (every property is different) requiring an approach and a solution that fits the specifics of each individual asset.  The hotel industry is very different from the office sector, etc.  It is somewhat safe to assume that lending community has been measured and temperate in their initial response.  There is a favorably disposition by the banks to a “short-term forbearance” that will bridge to a time when the severity and public policy response to the pandemic offers some clarity.  This maybe every-ones Waterloo.  We don’t know that will occur in three- to six-months, and the country is so divided that there is little tolerance to maintain the necessary requirements to keep people safe.  Or in other words a return to a normality that is financially tolerable.  Without some type of return to normality there will be a pain.


JOD  May 27, 2020 

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