The market disruption caused by the Covid-19 pandemic, and the response by governments to enforce protracted stay-at-home policies, will likely result in an unprecedented period of economic instability and recession that could last as long as three years. That’s the view of 35-year real estate finance veteran Ethan Penner.

“Economic expansion and asset value reflation following the global financial crisis of 2008 was already ‘long in the tooth’ and a correction/downturn was not a question of if, but when,” says Penner, CEO and co-founder of Mosaic Real Estate Investors.  “A slowdown was inevitable, but given strong employment, solid job growth and a low interest rate environment, a soft landing was expected.  That all changed in March, when the virus and the nation’s reaction to it put the brakes on almost every sector of the U.S. economy.”

Until a vaccine is found for Covid-19, the road to recovery will most likely be extremely bumpy, according to Penner, who is credited with creating the CMBS market that helped the U.S. economy emerge from the recession of the early 1990s.
Odds are that this won’t occur for at least several months.

While states are beginning to lift restrictions in order to open up their economies, the initial steps are very small and public buy-in has been tepid. “With consumer spending the primary driver of economic growth, there will be a lot of pain at every level over the next 12 to 18 months,” Penner says.

“The health of the commercial real estate market is directly related to the health of the economy,” he adds. “Investors, developers, commercial and residential landlords are all facing the potential for significant financial losses.”

Among those in line for the greatest heartache are borrowers that utilized short-term financing for long-term assets, with the belief that banks would continue to re-up their loans at each maturity. In an illiquid market, that’s not how it works.

“In the worst-case scenario, it may take three years or even more before an asset is stabilized and owners and investors can count on generating revenue levels commensurate with their 2019 levels again,” Penner says. “A key for every asset owner, even those with the very best real estate assets, will be to ensure that they have enough liquidity to survive until that time. This will likely involve attracting new investor capital, in that no real estate owners would have ever thought to have that level of liquidity on their balance sheet.”

Nonetheless, he says, “Even accepting that investors today will require a higher return, reflecting today’s high-risk and less liquid market, taking this capital and paying the freight to do so is a relatively small price to pay to preserve investments that will likely rebound in value after this storm has passed.”

For comments, questions or concerns, please contact Paul Bubny