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  • Writer's pictureJSO Valuation, Ltd.,

Where does real estate go from here – the affect of the Coronavirus?

Updated: Apr 27, 2020

Updated (edits) April 27, 2020

The retail sector is a sector that if we are honest has been struggling for years. In some of real estate conferences I have attended in the past 24-months, the focus when it comes to retail (or all the sectors for that matter) has always been on the major players, who by all accounts up until now were as strong as ever. Or this is what we were lead to believe by successive up-beat predicting speakers, most being brokers. But, there was a lack of focus by any of these professionals on what are the majority the stores from Main Street to the older in-line strip centers scattered along most major and secondary circulator roads. Lets face it - the bricks and mortar retail sector is just a mess. Small to medium sized offices, older industrial structures, etc., were equally ignored. With the advent of the Corona Virus, the last month has changed the retailing landscape, and I am not so certain it can be changed back to where is was in January of 2020. There will always be the survivors, but what about the investors in large and small properties all the way up to REITs that own many of the Class A properties. What of their tenants and their inability to pay their monthly rent? Has this crises been handled correctly and where does the proverbial ‘buck stop’ when it comes to how all of this was handled in the first place?

Retail maybe the hardest hit, but we are already seeing significant stress and value losses in multifamily housing, Class B, C and D industrial properties and office buildings from the suburbs to the Central Business District. With the staggering amount of unemployment and a date to attempt to restart the economy still a month or two away, stress in the real estate sector is only going to increase.

History of the Virus

However, prior go getting into this article, lets see if we can accurately trace the history of this virus as spread quickly out of China. This particular type of respiratory disease is caused by a virus called SARS-CoV-2. (Severe Acute Respiratory Syndrome) It is part of an extensive family of coronaviruses, the majority of which cause only the simple common cold. It is referred to as SARS-2 as it has many commonalities with SARS or now SARS-1 or officially SARS-CoV or SARS-CoV-1. These two respiratory diseases acted in a slightly different way. SARS-1 became more contagious after symptoms were developed where SARS-2 is very asymptomatic for up to 14-days after infection. There have been no reported SARS-CoV-1 cases world wide since 2004.

The Chinese in 2019 discovered a related SARS virus when it surfaced in an outdoor seafood market in Wuhan. It was eventually to bring about the Coronavirus pandemic of 2019-20. Similar to MERS (Middle East Respiratory Syndrome - MERS-CoV) and SARS, this coronavirus likely jumped from an animal to a human, perhaps via some other species. It was mysterious enough that the World Health Organization (WHO) was first alerted to several cases of pneumonia like infections in Wuhan, a city in the central eastern Chinese province of Hubei, on December 31, 2019. By January 7, 2020 the Chinese authorities identified this mysterious infection as a type of coronavirus. By January 12, 2020 the Chinese felt it important enough to share the genetic sequence of the novel coronavirus to all countries including United States to use in developing specific diagnostic kits.

The following day January 13, 2020 the Ministry of Health in Thailand confirmed their first case of SARS-2. Two days later on January 15, 2020 the Ministry of Health Labor and Welfare in Japan confirmed their first case. It was another five days, January 20, 2020 that The Republic of Korea was to report their first case. By January 20, 2020 the number of confirmed cases had increased to 282 with all but four being in China.

The first case reported in the United States by the CDC was in Washington State on the following day January 21, 2020. The man, who has since fully recovered, had been in the city of Wuhan. The first reported person-to-person transmission was on January 30, 2020 by Chicago health officials, where a woman who also had been in China transmitted the virus to her husband. While the instances of community infection was occurring worldwide, the first community infected individual was in California on February 26, 2020. There was a delay due to the inability to test the patient. Community infection is basically the spread of the illness with no known source of the infection. Significant inaction over the prior four-weeks, denial and partisan bickering over the next month pushed the United States to the unenviable position of having more confirmed COVID-19 cases and any other nation in the world. Two-months or over 60-days had been lost.

The main issue is that there had and still is a lack of testing kits, PPE (personal protection equipment), ventilators and continued in-action such as COVID-19 anti-body testing. The combination of both testing for the virus itself and anti-body testing to establish all the people who have contract the virus is one of the fastest routes to getting this country opening again. There is also been a reluctance by the current administration in Washington DC to follow the science. This has lead to significant confusion and even demonstrations such as in Detroit this week. While the State of Washington initiated social distancing, closed schools, restaurants, religious places of worship, etc. and halted all large gatherings of people in order to successfully flatten the curve, the rest of the country was slow to adopt these same procedures. Some states at the time of writing in this article (mid April) are still pushing back hard.

So just to be clear, when did we know about this virus and how did we respond? In 2019, Health and Human Services conducted an extensive simulation of a SARS like scenario where a respiratory virus and in this case it was dubbed "The Crimson Contagion." The simulation had it starting in China and rapidly spread through-out the United States. The draft report from this simulation was reported to have raised plenty of red flags about many government shortcomings and the Federal Government's response, supplies, all the way to their messaging in containing the Crimson Contagion virus.

In November 2019, Covid-19 broke out in Wuhan. According to an ABC News Report, by the end of November, the National Center for Medical Intelligence (a branch of the Pentagon's Defense Intelligence Agency), through data intercepts and satellite imagery, identified the virus outbreak as a potential threat to US troops in the region. The Agency however issued a rare statement April 8, 2020 debunking these claims that it produced a report warning about the novel coronavirus as far back as November. However, the independence of the civilian leadership of the US armed services has come under intense scrutany lately.

The Independent, powered by Microsoft News, stated that “Peter Navarro, the China-hawk trade advisor, wrote a memorandum on January 29, days after the first case in the US was identified, stating: “The risk of a worst-case pandemic scenario should not be overlooked.” The President claims he never saw the memo (he is not a reader), although presumably many senior-level people saw it and surely Navarro if not others would have conveyed that information to the President

On February 23, when there were 14 cases in the US and still no deaths, Navarro wrote another memo describing the “increasing probability of a full-blown Covid-19 pandemic that could infect as many as 100 million Americans, with a loss of life of as many as 1.2 million souls.” By this time, the Coronavirus Task Force had been formed and Navarro wrote to its members: “Any member of the Task Force who wants to be cautious about appropriating funds for a crisis that could inflict trillions of dollars in economic damage and take millions of lives has come to the wrong administration.”

But Navarro was in fact identifying the President, who was denying the severity and dithering about making a $2.5 billion funds request to fight the virus. Congress appropriated $8.3 billion on March 4. It has now appropriated more than $2 trillion, with much more contemplated. Much of this might have been unnecessary if the President had not wasted potentially up to 70 days talking about hoaxes, the Democrats and the flu and had instead implemented the ability to conduct mass testing and initiate social distancing. Make no mistake, the Independent wrote, “The Trumpian brew of hubris, narcissism, blaming and incompetence will kill tens if not hundreds of thousands needlessly” (

It does appear that this is a crisis partially man-made and partially biological. It appears that as of January 1, 2020 there were many who were well aware of the potential outcomes, but may not have fully understood the economic fallout. By government intransigence, potentially up to as much as 70-days were wasted. Had we being more like South Korea and their ability to test and contact-trace all who may have been infected, one can only imagine where we would be today. As of April 17, 2020 there have been, according to John Hopkins University, a total of 662,045 cases of coronavirus. In the United States, almost 29,000 people have lost their lives. Worldwide, 159,948 people have lost their lives.

Current real estate issues that as a nation we now face

Lets look at some current issues… The focus is mainly on retail as there is more immediate data in this sector. However, multifamily is reeling and this may get significantly worse before there is a stabilization and recovery. There is even less data to date for industrial and office properties.

  • Before the corona virus pandemic, retailers already struggling to keep their lights on, COVID-19 could be forced to turn them off, for good.

  • There could be many more than 15,000 store closures announced by retailers in 2020, in large part because of the pandemic and this will be a record.

  • Bricks-and-mortar retail has already been grappling with overwhelming changes in consumer shopping behavior.

  • The Cheesecake Factory told its landlords that it would not be paying its April rent. That’s not a bluff, but can the other in-line stores in these malls also say that April rent is a no…no?

  • Are REIT investors fully appreciating the risks that lie ahead? There is a range of potential outcomes for those funds heavily invested in shopping malls. We have never had a recession that looks quite like the last month with an absolute and complete hard economic stop.

Bricks-and-mortar retail has already been grappling with overwhelming changes in consumer shopping behavior. According to Business Insider a record 9,300 stores closed in the U.S. in 2019. This eclipsed the 2017 closures of 8,100 stores. This too was also reported by the global marketing research firm Coresight Group. Real estate services firm Cushman & Wakefield has estimated that 2020 could beat that record with some 12,000 closings. Other estimates are understandable higher. Some of the marquee stores closing are Pier 1 who is due to close 450 locations (50% of their remaining stores.) Walgreens will close 200 stores. GameShop 320 stores, Chico’s will close up to 250 stores. There is also the Gap, Art Van Furniture, Gordmans, Forever 21 and many more have all announced closings. But it is only April 2020 and many of these announcements came 2019 for 2020 fiscal year. These are frontline stores in significant shopping centers and the affect of mall closures through April and maybe even May to June could be devastating on so many fronts. This has been a major worry for many of the major funds which have significant ownership positions in these buildings.

But what about the rest of the retail stores that are run and operated by what is typically referred to us “Ma and Pa” locations and owners. They offer anything from books, toys, to paper products (stationary etc.) to apparel, etc. They are located in the myriad of smaller to medium sized communities, to larger downtown locations and also along major street. They are mainly located in these older five- to 10-unit little strip centers, or older stand-alone vintage buildings. A lack of customers, rising rents, aggressive real estate taxation and more importantly a significant change in shopping habits, such as customer foot traffic have made many of these locations impossible to financially maintain. The question is how long can they survive? Across the board, sales tax revenue was plummeted, local governments are going to get very desperate considering the medical/unemployment situation, along with their current debt loads that these communities were carrying before COVID appeared. Property tax revenue will be a target, but in what format?

It gets worse. According to, economists say the United States is entering a sharp recession, with some projecting gross domestic product is headed for its worst drop in quarterly records going back to 1947 (March 31, 2020 - Economists See U.S. Facing Worst-Ever Quarterly Contraction). As of April 16, 2020, 22-million people have lost their jobs in the last four-weeks ending April 11, 2020. 6.6-million filed for unemployment in the week ending April 4, 2020 and a further 5.25 ending on the 11th. Estimates on GDP and unemployment vary and as the pandemic unfolds clearly they are changing by the day. Goldman Sachs (March 21) estimated GDP of -9% for the first quarter and deepening to -34% by the second quarter. Overall for 2020 the GDP may contract as much as 6.2%. According to Barron’s (April 1 2020), neither Goldman Sachs nor Deutsche Bank upgraded its

outlook for 2021, which means they think that the economy will be operating well below capacity for years. For real estate this is a poor out-look indeed. There is a lot of vacant product that will stay vacant for several years into the future.

Unemployment by mid year has been estimated to be as high as 15% but this has already been exceeded. As of February 2020 according to the Bureau of Labor Statistics, there were 164.5-million people in the civilian labor force and the unemployment rate was 3.5% or 5.76-million people. Over the last five weeks unemployment insurance claims totaled 26.5-million. These new claims added to the 5.76-million people on the rolls brings the current rate to 20%. It gets potentially much worse ( with predictions of an unemployment rate of 32.1% in the second quarter of 2020 (52.81-million people out of work).

Deutsche Bank was predicting a GDP of -2.2% quarter-one and deepening to -32% by the second quarter. Unemployment by mid years was estimated to be closer to 13%. NatWest Markets, Morgan Stanley closely mirrored Deutsche Bank. Finally oil prices have collapsed with the perfect storm of the Corona Virus plus Saudi Arabia and Russia engage who until recently were engaged in a brutal price war. Louisiana Light closed on March 30, 2020 at $5.85 per barrel (42-galloons) or basically the cost of a pint of beer. It is currently trading at just over $20.00 per barrel. Brent Crude was $84.58 on October 18, 2018. It was trading at $19.59 a barrel (late April). Both have recovered slightly but these are economic indicators that should not be ignored. With the lack of any demand, there is now a substantial lack of storage capacity resulting in the disastrous May Contract where Louisiana Light hit a staggering minus $34.73 a barrel on April 20, 2020. This is a sector of the economy that if fails will have immense ramifications across the board.

It is difficult to get a handle on the “real” unemployment rate. The U-6 is by all accounts the broadest measure of unemployment. It includes those who have given-up looking for work and those who are working part-time but would prefer to work full-time. Many people consider U-6 the real or most reliable unemployment rate.

The Bureau of Labor Statistics yields to U-3 which is the seasonally adjusted and the commonly quoted unemployment rate found in the media. The latest available for U-6 is 8.9% as of March 2020. U-3 was so significantly lower at 4.5%. This is where statistics really clouds the picture. reported April 14, 2020 that the projected April 16, 2020 unemployment rate will be 17%. JP Morgan have estimated that the current rate is 20% and as we saw above was closer to what is occurring today. But what’s most astounding is the pace of the job losses. In looking at the graph above, there has never been such an event. President at the Federal Reserve Bank Of St. Louis, James Bullard, U.S. economy should recover strongly in the second half of 2020 if the government and businesses respond forcefully to the coronavirus, with massive testing to prevent fresh outbreaks. Bullard repeatedly stressed (and this has been re-inforced by almost every business leader) that mass testing of Americans is necessary to ensure confidence for workers to return and businesses to invest. But even by 2022, unemployment is expected to average 5%.

Again according to Bloomberg, “Bullard [also] called the shelter-at-home quarantine that has shuttered important parts of the economy an inefficient but appropriate response as the pandemic spread through the country. He estimated it is costing the U.S. $25 billion every day in lost household income.” In reality, we are going to have to wait on that number and also wait to analyze the shelter-at-home quarantine that Bullard was no fan. But I believe that Governer Jay Inslee of Washington State may just disagree with Bullard.

The St. Louis district project potential total employment reductions of over 47-million, which would translate to a 32.1% unemployment rate. It appears we are already half way there. Bullard forecast that the unemployment rate could top to 30%, which is higher than it was even during the Great Depression. The affect on real estate will be devastating if this was to occur and the bounce back could be painfully slow.

Paying Rent today?

The Cheesecake Factory announced it was suspending rent payments for April 2020. This is a company that had a market cap of $800 million. They typically signed leases between 10- and 20-year, are considered a high credit tenant and since these contracts are typically on a triple net basis they are a extremely attractive to REIT investors since their average tendency is on average over 16-years. In 2019 it was reported and they paid $179 million dollars in rent alone.

So what is the knock-on affects to this decision. REITs are in a very precarious situation. If they go along with the Cheesecake Factory decision, what about all the other stores in their shopping centers. Would they too not want a rent break, suspension or other intervention? How about fitness chains, movie theaters, salons, etc., would they also not want to significant break since they are closed and with the continued need for social-distancing their opening maybe months away? Bloomberg in there March 24 issue highlighted the fact that landlords cannot afford to stop collecting rent since many owners are sitting on excessive amounts of dept. Maybe the federal government will allow banks the leeway to differ mortgage payments for the time being. But to be frank, could that help and could it help everyone. Where does “Force Majeure” fit into this entire debacle?

Wikipedia defines Force majeure as being a "common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic or an event described by the legal term act of God, prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party's non-performance entirely, but only suspend it for the duration of the force majeure.

This really is way to early to tell if force majeure will be a factor or not. It is our understanding that tenants are saying they will enforce the clause but how the courts will treat this is clearly unknown. But if the different assessing authorities decide this is not worth their effort in understanding what is occurring in the market place, they are doing their constituents such as the school districts local governments, etc. who rely on property taxes to fund their operations no favors whatsoever. Lets face it, this is a different world for everyone.

The forced temporary closure of stores mainly throughout most (80%) of country is having a drastic, compressed and a more immediate effect than was ever anticipated. Mattress Firm with their 2,400 locations is reeling from the sudden and complete loss of revenue.

Subway restaurant, which have 20,000 US locations, have sent a letter to their landlords stating it may cut or postpone rental payments. Some landlords are responding positively, while the others are in a complete quandary as to what to do. According to CoStar Group Inc., U.S. retail landlords collect more than $20-billion in rent in a typical month. Bank of America downgraded several REITs. The bank maybe anticipating closings lasting through May or beyond affecting fragile retailers first, with many being forced into bankruptcy. This will increase the pressure on REITs. Rent deferment most likely will not help. Many say its just kicking the “financial can” down the road. It does appear that the Cheesecake Factory will not be their major issue; it was just their morning alarm bell going off. It is still ringing.

But unfortunately the pain not just retail. WeWork said it will not be sending out all of their April rent checks. It does appear that things are looking pretty grim for the company at the present time. It has been reported that they have engaged both JJL and Newmark Knight Frank to help negotiate either rent relief or the conversion of their lease deals into profit-sharing agreements (most likely a non-starter from the beginning- but who knows.) WeWork stopped paying rent at some of its locations in April as it is bracing for a terrifying drop in business in May and June. The big question is how much money asset-heavy WeWork can maintain over the next few months. The company had $4.4 billion in cash at the end of 2019, but reported a burn rate of $1.25 billion as recent as the third quarter of 2019. This may not be enough to save the company especially if unemployment does spike higher to that 30% in the coming months and there is a significant delay in a return to normalcy.

The staggering 22-million people who have had to apply for unemployment benefits in the past four-weeks, has multi-family landlords bracing for the consequences. According to the National Multifamily Housing Counseling and also reported in the Wall Street Journal, nearly 1/3 of tenants in the first five days of April did not pay rent. This is compared to 81% in 2019. Clearly on the multi-family side, this is putting severe strain in the system. In the interview with The Real Deal, New York Real Estate News, Barry Rudofsky a spokesperson for Bronstein Properties, which owns around 5,000 mostly rent-stabilized units in New York City stated that they we are counting on payments from tenants who were either still employed or not facing hardship. According to Rudofsky, current rental collections are already significantly down. There is a worry that landlords will not be able to pay their mortgages, property taxes, utilities and their essential workers. Rudofsky is really mirroring the entire country. The feeling is that as one slides down the ‘rental-totem-pole,’ those buildings that lease to the many workers in the gig-economy will report even higher rental losses in the coming months. They too have the same mortgages, property taxes, utilities and essential workers to maintain their buildings. Rent will be due again in two-weeks and owners and banks are bracing for the COVID-19 effect. For this paper it’s simply to early to tell, but multi-family housing takes many forms. What has the affect been on Limited Equity Cooperative housing? Many mobile home parks have a heavy emphasis on personal property. Can these two user classes, coops and mobile home park tenants continue pay rent without jobs? If a mobile home owner is paying for their unit (in addition to their pad) with the intention of buying, how does rent interruption affect that contract.

A survey compiled by the London based Remit Consulting using data from leading property managers and published in Property Week (April 8, 2020), offers a detailed picture of the impact of the coronavirus outbreak on office rent collection. It stated that only 48% of rent due was paid on rent ‘quarter day,’ increasing to 57% seven-days later. The equivalent figures for last year were 79% and 90%. Quarter Days have traditionally been considered those days upon which debts, such as additional rent, pass throughs, added billing etc. are settled. The most recent Quarter Day was March 25, 2020. The low levels of service charge or additional rent that was not collected particularly concern property office managers. It clearly makes it harder to keep up with the costs of running buildings. The situation is also especially difficult for shopping centers, which have to be kept open for the stores that are still trading.

Developing a Case Study

For this case study we are going to look at a property that we have recently valued outside of Illinois. Briefly, this property is a one-story, 11-unit, 94,932-rentable square foot, masonry, dri-vit- and concrete block-constructed, neighborhood shopping center. The units range in size from 1,700- and 29,498-square feet. The center was first constructed in 1990 and therefore, has a chronological age of 30-years. It sits on a mostly regular shaped corner parcel that measures 349,344-square feet or 8.02-acres, however access and visibility are below average to poor. The daily traffic count is 36,300-vehicle per day. Its land-to-building ratio is 3.68:1 and it is zoned for commercial use.

Of the stores at this location, we have heighted three potential stores that could be located in this center. This is a case study, therefore tenant facts have been changed (but close substitutions). These three tenant types have been highlighted to make the point that there will be a new reality once the country starts to return to normal. We choose Mattress Firm, Men's Wearhouse and Party City. They were chosen as they are all super vulnerable and COVID-19 has made their situation so much worse.

What we are not sharing. The Income and Expense history of which we had three-years. The location, the conditon, the amount of parking, etc. In our analysis we will not be covering from an adjustment point of view location, physical charactericts, legal charactericts but we will introduce to everyone who is not familier Economic Characteristics and Non-Realty Compondents to Value.

According to the 14th edition of the Appraisal of Real Estate, Appraisal Institute, Economic characteristics include all the attributes of a property that directly affect its income. This element of comparison is usually applied to income-producing properties. Characteristics that affect a property’s income include operating expenses, quality of management, tenant mix, rent concessions, lease terms, lease expiration dates, renewal options, and [other] lease provisions such as expense recovery clauses [etc.]

Non-realty components of value include chattel, business concerns, and other items that do not constitute real property but are included in either the sale price of the comparable property or the ownership interest in the subject property. The COVID-19 falls squarely into this category.

Looking at the history of three potential tenants. In this process one really needs to understand how sure ones footing is when developing a value.

According to MoneyWise, an overzealous expansion by Mattress Firm to almost every neighborhoods in America has taken its toll. In 2018, USA Today reported that there were more mattress stores in the country than McDonalds had location. But these mattress store executives had even more reasons to lose sleep. Mattress Firm’s parent company, Steinhoff, was embroiled in an accounting scandal involving billions of dollars in balance-sheet errors. Mattress Firm filed for bankruptcy in 2018 and closed 700 stores, but the chain still did not recover. Competition from online bed-in-a-box retailers, particularly Casper, were continuing to have a significant impact on the mattress industry with their pricing, lengthy trial periods and free returns (ironically not so different from the bricks and sticks stores except for pricing). The worry is that this is a store that may not open or will require significant reductions in rent that will make it impossible for them to continue in this location.

When Joseph A. Bank and Men's Wearhouse merged together into Tailored Brands in 2014, their respective management teams felt there were synergies to the merger. However as time went on, it was fairly clear they were mistaken. The company's recent fourth-quarter (2019) report showed its continued decline, they miss on revenue

forecasts, and total sales down 10% year over year. Tailored Brands shares stood at $2.06 on April 14, 2020 and on April 17th closed at $1.63 per share. The stock had dropped 62% in the since the most recent high of $4.30 per share on February 20, 2020. Almost a year ago the stock stood at $8.25 on April 17, 2019. This is a retailer who is struggling with $1.2 billion in debt. The fact is that people don’t wear suits to work as they once did. So is you give away one or two suits with every one suit purchase, its just not what is demanded any more. There is a 50%/50% that this is a franchise for the history books.

Party City is among several retailers that went into 2020 with a weaker position than the prior year. It had over 875 locations as of December 31, 2019. But this is a franchicse has been suffering from continued falling sales, shortening margins but most of all negative profits. The spread of SARS-2, has simply upended this retailers world as malls close and many shoppers avoid the stores that were still open. Party City may have voluntarily closed their doors but with a shelter in place throughout the majority of the country, there was little demand for their primary products. The other major factor is Party City's long-term debt which now stands at $1.6 billion. The retailer has a term loan due in 2022. Again like men’s warehouse, subtle shifts and retailing, the Amazon factor and now this unbelievable unemployment rate has sucked all disposable income out of the marketplace. This is going to have a significant and direct effect Party City. On February 20, 2020 the share price was $2.97. It closed on April 17, 2020 at $0.42 per share. One year ago on April 17, 2019 the stock price was $8.18 per share. Party City announced that it received notification from the New York Stock Exchange (“NYSE”) on April 9, 2020 that the Company is no longer was in compliance with NYSE continued listing criteria that requires listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period. The stock was last over a dollar per share on March 11, 2020 trading at $1.05. The stock will continue to trade under the symbol “PRTY” but will have an added designation of “.BC” to indicate the status of the Common Stock as “below compliance.” Clearly, from a landlord’s point of view this is not the news one wants to hear.

Below is a typical rentroll.

Lets assume that 2020 was a perfectly typical year. In the table below are the abreviated actual expenses. There are a few notible items. Revenue in the form of the Effective Gross Income is declining despite a less than 2% vacancy. The Net Operating Income for 2019 is the lowest in three-years. But lets assume that while there is a downward trend the property will continue on its current path.

Below is a stabilized income and operating statement for this property. Revenue has not been trended downwards, vacancy was held at 5% even though we are aware of some very poor tenant prospects and expenses have been kept to 46% including a Reserve for Replacement, a recognition of future Tenant Improvements and Commissions.

There was plenty of information that was not divulged in the case, but it safe to say that this is a strong Capitalization Rate for this property (this takes into consideration its current economic characteristics, physical characteristics including its age, condition, parking, visibility, etc.) So the potential market value is say $140.00 per square foot. In the market place there were adequate sales to confirm the value via this approach. There were few higher sales. But most importantly the Economic Characteristics are good.

But now lets look at this from the position of social distancing, unknown time-table for reopening the economy and a further erosion of the retailing environment.

In this next analysis we are now accounting for the loss of tenants. We believe that there is a strong possibility that the three units highlighted will not be reopening when local conditions allow. We are stressing local as every part of the country will be different. There also may well be further restrictions if the flattened curve starts to climb again. Without a vaccine, testing, contact-tracing this is significant possibility. The three tenants were chosen mainly due to the fact that the units themselves were already in trouble with one clearly being abandoned by investors.

The loss will bring the vacancy rate up to 30% immediately. This is not accounting for any reduction in the base rent many of the other tenants have been asking for and some will receive. It’s impossible to even estimate at this stage how long the now four vacant stores will remain unoccupied but we have phased back the tenant spaces at 5% per annum. Achievable? These are large deep stores. Over the five-year period however, we believe so. Retail is going somewhere but we are not sure where and this is after all a center that is 30-years old.

Finally we have had to make assumptions and this are outlined in the text box to the right. These really cover the Non-realty components of value. The Discount Rate of 11% recognized that things are different. The terminal Cap Rate is clearly stating there is significant risk in the future and this may spill over the liquidity and capital depreciation. This is an all new territory not just for this property but for every property.

There are many outstanding variables such as the significant fall of in income that as we have said is most likely still undercounted for in the above year one revenue totals. Base rent reductions and many tenant simply not paying rent. Pass throughs that will just not be paid. Commissions and Tenant Improvements were only calculated at a combined 3%. These two combined could be as high as 12% in a given year and blended down to between 4% and 6% over the five-year analysis, with the greatest expense coming in the earlier years. Reserves for replacement were kept at $0.22 per square foot. This center is three-decades old and putting around $20,000 aside will not cover to many capital projects.

Finally in the table below and from my point of view, I prefer to see the majority of the value in the summation of the net operating income (top line of $2,918,857.) In this analysis only 27% of the value is from the top line. The sixth years discounted capitalized income accounts for 73% of the market value. Six years in this market is a long time to wait to develop a 75% of the potential estimated market value. COVID-19 will be long gone but its effect will be living on.

Even being conservative there is a recognized loss of 20% in the value as of today vis-à-vis the stabilized analysis representing the situation before COVID-19 occurred and was felt. This is pretty consistent to the loss in value to many of the REITs. This is significant but clearly can change as hard date becomes available in the coming months. Earlier in the week I did hear Dr. Mark Dotzour (, real estate economist speaking. He did believe that Capitalization Rates would hold steady and gave several examples. However for the run of the mill properties that are not Class A, no one seems to be able to offer a definitive opinion. But with less tenants, leases moving toward a modified gross basis in favor of the tenant (not just in retail but every property sector), reduced base rents, etc., the Cap Rates can not be holding steady as they were in January 2020 and as to December 2020, the safe assumption is that Cap Rates will be higher.

High Street Banks

What about the high street banks? Well what kind of risks do banks have in the first place? Credit risk, market risk, operational risk, and liquidity risk to mention a few.

There is also something called Systemic Risk. This particular risk is a nightmarish scenario for any bank. In a nutshell, this is when the entire financial system comes to a complete and utter standstill. The default of one particular bank can have a knock on effect that in turn threatens the stability of the entire monetary system. Lehman Brothers in 2008 is an example of a financial institution that triggered a massive selloff across the entire banking sector. But an epidemic or in this case a pandemic it is not limited to one particular banking organization but the broader financial sector. Remembering that 2008 was a liquidity crisis where this is a solvency crisis. This is so much more serious as there maybe little the Feds can accomplish in the end. Banks with weaker capital bases would be at the highest end of the risk scale. Systemic risk however will affect us all one way or another should there be another financial crisis such as the one triggered in the 2008 recession.

The Trump Trade War

The Tax Foundation stated that: “Trade barriers such as tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers, which results in lower income, reduced employment, and lower economic output.”

It is clear to most people that tariffs cause more economic harm that any added benefit other than political. Openness to trade and investment has substantially contributed to significant growth throughout the United States. Before the COVID-19 pandemic prices across the board were already increasing. In several conversations with different steel users, the Chinese tariff consequences on their business had a direct and negative result on their bottom line as they struggled to hold prices in check and retail their customer base.

Trade has resulted in higher levels of productivity, income, and output throughout the economy. Competition is strong and there is a constant need for innovation. In the last few decades, increase in our trade abroad has made the United States substantially more productive and it has contributed to very significant increases in the standard of living of most (not all) Americans. Since the War (Second) annual global traded according to Cathleen D. Cimino-Isaacs, (U.S. Trade Policy Primer: Frequently Asked Questions,” Congressional Research Service, April 2, 2018) has outpaced GDP growth, growing on average 1.5 times faster (Impact of Trade and Tariffs in the United States, Erica York, June 27, 2018, Aiding this are reductions in barriers to international exchange.

Prior to COVID-19 the reasons or the rationale from the Trump tariffs range from national security (not to sure about that one) to misconceptions about trade balances to (more reasonable but not my choice of punishment) intellectual property theft by China. This was mainly achieved by the need to partner-up with Chinese firms. There was wide spread agreement that many trading practices were unfair, but imposing significant tariffs was not the approach that was going result in any significant policy changes. We saw that late in 2019, when Trump all but capitulated to the Chinese for fairly nebulous promises of future agricultural purchases. The damage was done and job losses were creeping into the economy. Than came the Corona Virus.


So we have a world-altering virus affecting everyone in one way or another. Bravado up until recently was the brokers creed. Store closures may (will) break all records in 2020 and its affect has yet to be measured. Stores from Main Street to the sprawling suburbs are in trouble.

In recently valuing a portfolio of 30+ locations in the Chicago area (mainly retail and small office buildings), vacancies are chronic and sustained over time. Asking rents are now effectively on a gross basis and tenancies are as short as they ever have been. The owner of this portfolio stated that a Capitalization Rate of 12% was more realistic. This is at least 200 basis points above where we would typically peg this type of property. But he has not been able to find a buyer even at a 12% capitalization rate.

Major credit tenants are stating that some April rents were not in the mail and May does not look any better. Banks are flirting with a nightmarish scenario called systemic risk and the affect of the Presidents tariff war is adding to the country’s (especially the farmers) misery. Large companies went already existing credit lines are exercising these lines at record rates.

Kevin Cody, senior consultant at the research firm CoStar Group stated that retail investment slowed with sale volumes and pricing falling and so many properties are just loosing value. This is true across the board, for malls, power centers, neighborhood centers, strip centers and of course those small older retailing units that were prevalent in the 1970s and 1980s and found ever where. They have all seen their Capitalization Rates rise over the past few years, which can only have accelerated in the last month. Malls especially have taken a hit, but potentially well-located class-A malls have held up better, for now. But this value slump may not be confined to retail. It is hard to say mid April 2020, but the general feeling is that all sectors will be affected and some harder that others. Age, location, condition, tenant profile, etc., will all be significant factors.

We have looked a one case study and established a value loss based on all the data we have to date as being in the region of 20%. But we are aware it will vary from building to building and State tom State, but there will be value losses and when it comes time to refinance issues may arise.

This is the second article where the first had answered absolutely no questions whatsoever. That is because as of April 1, 2020 there are simply no answers just miserable litanies of events that had occurred in March. However, as of mid April where there where many prior underlying issues many of these have become crippling for some property owners. Others are just waiting and seeing, with almost no control over the unfolding events.

This update 17-days later, maybe more grim but not too unexpected. Some answers are revealing themselves, but at this stage we will have to look to 2021 to really see the swath of damage left in COVID-19s wake. County Assessors are in an unenviable position. Communities need tax dollars, but they (the assessors) are all to aware that there has been a change in value and not upwards. Some Assessors like in Cook County, Illinois did not come from a real estate back-ground and this is now a significant weakness. They rely on other professional many who may have real estate back-grounds that do not fit the job of assessing all properties fairly. In Cook County itself there is a complete lack of transparency, ethics and fairness. I suspect this is repeated all over the country where real estate tax revenue drives the local economies.

Looking back at the 2008-09 recession, significant time passed before the economists could truly understand what had occurred. The real worry is of course… Can we as a Nation, State, County and City weather the storm?

About the Author

John O'Dwyer is the president of JSO Valuation Group, Limited. This is a national appraisal firm located in Evanston Illinois. JSO specializes in valuations of low-income limited-equity cooperative housing, self storage warehouses, community or club swimming pools, convenience stores along with the traditional commercial buildings such as offices, retail and industrial properties. The firm has an emphasis on property taxes appraisals, estate valuation and insurance valuations. In addition to position papers on the commercial swimming pool industry, Mr. O'Dwyer has also written on the automobile industry, convenience stores with gas stations, death industry, automobile dealerships, to mention a few.

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