Commercial Real Estate Set Up For 'Profound' Recovery: MMI CEO

Bloomberg dot com. We continue to dig into the economic ramifications of some of the closures, and we've seen a number of retailers furlow or layoff whole hosts of workers, the latest being Macy's today saying that it was going to close after closing all of its stores in March eighteenth. Now it's going to furlow most of it's a hundred and thirty thousand workers. This has led a lot of led to a lot of questions about commercial real estate values,

rent payments and the like. Joining us to say I'm really pleased to say is Hassam no G He's president, chief executive officer of a major commercial real estate from Marcus and Millichap based in Calabas's, California, and Hassam, I'd love to get your take first of all, given the Macy's news, given the fact that we've seen retailers across the board just closed down stores in mass will this have a permanent effect on commercial real estate values that

have not even yet been priced in? Good morning. Thank you for having me on the program. First of all, this is unlike anything we've all experienced, and at the risk of sitting the obvious and that it's really a health crisis, and most of our clients and everybody participating our industries first and foremost concerned about the health of

their their employees, and their and their families. So it's very difficult to separate the emotional component of that with the business component at this minute, which is unusual, uh, from anything we've seen in the past. But to answer to your question, what's happening around us right now is hastening the trend that was already playing out for retail.

As you know, e commerce has really profoundly changed brick and mortar retailing, and a lot of the obsolete older shopping centers and a lot of shopping centers that relied on department stores have been heard badly by what was already happening. This is just speeding that up. I think there's going to be more short term pain because of it.

Clearly there is no way around that. But I also want to point out the rebirth of retail, where we've seen so many examples of renovations, repositioning, and re tenanting of retail that has been widely successful and has become

a great investment vehicle. And there are components of retail like the stable grocery anchored type of retail that is of course doing very well right right now, but was doing well even before the health crisis began, and fast food restaurant, drug store, single tenant retail where you have one tenant on a long term lease and is much less risky. Those are doing very well and in great demand by investors. Some taking a look at the two trillion dollar fiscal stimulus package, what was in there for

real estate? From your perspective, I think the most important part of the package is the fact that there's three d and fifty billion dollars allocated for small business forgivable loans and five billion for a large companies. As as much help as can be delivered to companies to stay afloat during the worst of this health crisis in order to limit employee layoffs is the most important component because that has to do with tenants, and tenants have to

do with the octancies of commercial real estate. In addition to that, the way that the BED has stepped in at an unprecedented speed and scale very different from two thousand and eight two thousand nine. While we absorb, you know, the lack of a playbook, taking months to come up with solutions, has now resulted in their ability to be much more nimble and much more bold in the ways that come in to basically backstop liquidity and assure the

functioning of the of the credit markets. That's a a found help for not just commercial real estate, but but all businesses. And I think it really lays the groundwork for a rapid recovery. Just as much as this is going to be a very deep, painful downturn and hopefully a short term one, the recovery because of the action that's being taken, should therefore be just as just as profound. Because some there's some talk about the defreezing of corporate credit markets as the FED steps in and uh says

it's going to buy certain securities. They're given the fact that you're one of the largest commercial real estate financing companies close a lot of transaction. What's your sense of how much we are looking at possibility for just a complete shutdown or freeze in the commercial transactions going forward. Well,

we're seeing deals continue forward. We're seeing deals closed in the last two weeks, in the last few days because they still make sense and the buyers and sellers are comfortable with the execution, and lenders are still coming through. Many deals are not moving forward. Uh. Some lenders have stepped out of the market. There are a wide variety of reasons for that and the locations for that. It

isn't one or two trends. But the most important thing to remember is there will be a short time window where pricing will be difficult and being able to kind of read the market will be very difficult. But we expect as soon as the market kind of gets this putting on evaluation and begins to see the bottoming of the health crisis first and foremost, and then secondly the uh, you know, the beginnings of some kind of an economic normalization.

I think the market is going to move very fast with a significant amount of pen of demand and transactional activity. I think the FEDS backstop is critical during this uncertainty window of uncertainty because it's kind of prevents, uh, you know, a lot of loan defaults and a lot of if you will, fire sale expectations that really aren't justified. You know, we have to remember, prior to this crisis, commercial real estate was in great shape. We hadn't over build it,

we hadn't over leveraged it. The economy was in great shape. That added added to the all the actions that are being taken by the FRET and the government really spells it pretty uh, you know, pretty good shape. Samnogi, thanks so much for joining us to snog is the CEO of Marcus and Millichap talking to us about the commercial real estate business and clearly some tough times coming up

for that business. At Lisa and again we just saw some you know, it's gonna be really really difficult on a lot of you know, small and mid sized businesses, and obviously that'll be that'll trickle down to the real estate as well. Looking at w T I crewed twenty twenty cents a barrel just extraordinary here. So when we talk about commodities like oil, we talked about supply and demand, and it doesn't look good on either side for oil right now. That's why we're fortunate to have our next guest,

Ellen Wald. She's a president of Transversal Consulting and a Bloomberg Opinion contributor. Ellen, thanks so much for joining us. So we know the demand picture is bad and seemingly getting worse by the day. But let's start with supply. What are the Russians and the Saudis thinking about today? Well, exactly, Well, the Russians are probably thinking about the phone call that President Trump says he's going to have with President Putin

later today, during which he plans to discuss oil. But the interesting thing is that the real problem is actually Saudi Arabia. In fact, there's been indications that Russia is at the very least not increasing production and possibly interested in cutting it. We heard some indications of this from

some of the Russian oil companies last week. Meanwhile, Saudi Arabia is coming out and saying not only are they increasing their production to twelve million barrels per day, uh, it's starting April one, but they're also planning, starting in May, of making ten point six million barrels per day of oil available for export, So essentially they're taking their drop in domestic demand and they want to put that on the market to Alright, this has been leading to fears

and the reality of storage space being filled up. Literally there is nowhere to put all of this oil. And we saw in the US here a driller actually paying someone at one point to just take their oil because they had too much of it and needed a place to put it. What's the end game here? The end game is that production is going to have to decline. That's that's really the only option here. Dwellers are going to have to start plugging wells. Uh, they're going to

have to start reducing recounts. We've already seen recounts going down in the Permian. But the reality is unless they want to fill every ship on the sea with crude oil and products and every idle jet with jet fuel, Uh, they're going to have to calm down with this production because, Uh, the demand problem isn't going to be resolved immediately. Demand

is going to take some time to come back. Gasolene demand could come back pretty quickly once social distancing and lockdown restrictions are eased, But it doesn't seem like we're going to be getting that anytime soon. Alright, So give us a sense ellen of what the Saudis are thinking about here. What do you think is their mindset? Here? They can see where global demand is and is not h and they can look ahead and just see where

the storage capacity issues are. What are they really thinking here? Yeah, this is this is the big question. When when this whole issue got got started in the beginning of March this nowady has actually had a pretty good plan before UH the coronavirus lockdowns started across the US and then in UH, in Europe and now in India, demand was down, and particularly from China, but it wasn't bad, and so their plan to increase production was actually had some merit.

The idea would be increased production, you'll increase revenue even if you send oil prices down by a bit. The problem happened when, first of all, they got into this price more kind of narrative, and that sent prices down further than they probably would have liked. And then on top of that you add in the coronavirus lockdowns which were just killed demand almost immediately, and that sent prices down further. So now even if they're producing and selling

a lot of oil. If they're only selling it at you know, dollars a barrel, they're not making more revenue. And sooner or later they're going to have to realize that this is a serious problem. And I think we're going to start to see that in April as we see the big question is Ken Saudi MAYBEA actually sell all of this oil that have buyers? They say they do. Anecdotal evidence suggests that maybe they don't, but we're going to have to watch this play out basically in the

tanker space. Are we going to see these tankers filling with oil leaving Saudi Arabia and then unloading it? And if we don't, then that's going to expose Saudi Arabia's problem? And what does this mean for the shail patch when we see pipeline operators actually saying to drillers just stop, just keep it in the ground guys, because we don't have any space. Are they all going to go bankrupt? It's likely that a lot of them will go bankrupt, They'll be bought by others. There are going to be

a lot of consolidations. It's not going to be pleasant. We're going to see production slow down, in the United States, and we were already looking at somewhat of a production slow down coming on by maybe this is going to be a much more dramatic drop. The good story in all of this is that the oil is still there and when this is all over, when demand picks up, which it will then, and that oil is still going

to be there. And even if the same companies aren't there, new ones will likely form or the few that kind of brought up the assets of the others will start producing again. So the Americus future as an oil producer is not over. This is not the end of that story. Ellen Wald, thank you so much for being with us. Ellen Wald, president of Transversal Consulting, and a Bloomberg Opinion Calumness joining us. I gotta say, Paul, my favorite quote that I've read over the past few weeks has been

rocks don't go bankrupt. That that's one of the silver that's the silver lining for the show patch right now. Yeah, there's still oil in the ground, and as ellen said, when the market comes back, there will be some some oil people out there drilling and bringing it out for Yeah, although I do have to think, what does it say if you have pipeline operators literally saying just keep it in the ground. It's not going anywhere good right now, guys looking right now at Brent Crew, that's really what's

taken on the chin this morning. It's down to two dollars and sixty a barrel, the lowest in seventeen years. Interesting to see what's going on right now in credit in the meantime, because you have sort of dual forces, given the fact that oil prices are falling to the lowest and seventeen years, and then you also have concerns about growth, and then you have the FED trying to backstop the whole thing, which is leading to this jumble with a lot of dire predictions, and yet people still

saying it's time to buy Paul. Sort of this odd moment where there seems to be an opportunity here, but people aren't sure whether they're going to get just to quote to quote, walls speak, their faces ripped off in the process. Um And someone who's been attracting this really well and which has been frankly on the ball every time we speak to him is Greg Hahn, who wasn't necessarily as enthusiastic earlier about the enthusiasm we were seeing in the markets and now joins us chief investment officer

for Winthrop Capital Management. Greg I'm curious from your perspective, is this a time of opportunity in the high yield space or is this a time of growing risk. So so in the high yield space, we have to separate it from the high the high yield basis. In the end, we take the energy sector out because of what's going on with oil prices. We think the energy sector is going to go through some turmoil. Um and it's a it's uh. I think at the end of the day,

it's a buyer's market. But you've got to do your homework and you've got to be selective. But there's some good companies out there that are on sale. So what are some of the sectors? Are the companies that are on your screen at the moment. So we've been focused, candidly, we've been focused on the up and quality trade. So in away from high yield and the investment grade sector. The new issue market has been extremely active and where we can buy in the short end. The short end

has had some serious dislocations. So we were buying two in three year paper that had yields of six percent, which was just from force selling. We're also seeing opportunities in the CMBs market, and that's where the problems are gonna or is is we see you know, we expect um rent payments on the corporate side. We're gonna miss rent payments for April, We're gonna probably miss them for May um and so we're going to see some deterioration in some increase in delinquencies and CMBs, so that there's

force selling of the CNBS sector. That's put a lot of paper out on the street and that's kind of yields. What are your baked in assumptions, Greg, I'd love your sense as you extrapolate out of how deep and long the recession will be and whether that even matters in terms of where things are being valued in the opportunity therein. Yeah, So for us to make sense of this, we have to separate what's going on the economy and what's going on in the financial system with what's going on in

the capital markets. So we put those into it all gets pushed together. But if we if we focus on on the capital markets piece of it, Um, just specifically to your question, we think the ret the re sector right now is going to be challenged, but the way that it flows through in the commercial mortgage loan space, Uh, what we expect businesses to miss their April first you know, we're gonna see, you know, a decline in April first

rent payments. We're going to see a decline in May first rent payments, and then we'll start to see some um improvement after that as businesses just get back to up and running. And that particularly isn't that strip mall space where you see restaurants, mail salons, barbershops, that kind of service stuff that's effectively shut down for this period of time. So, Greg, what kind of economic assumption are

you guys kind of working on. We had a bunch of Wall Street investment banks over the last week coming out with GDP forecast quarterly for twenty twenty, and most had I would characterize as kind of a V type of recovery with a sharp, sharp contraction in Q two, but then it rebound in Q three and four. Is

that what you're modeling in Yeah? So we I can't put numbers to it, but we if we look at shapes of letters, um, we're not looking at a V shape recovery right now, this one's gonna be it's gonna be shorter than the financial crisis of two thousand and eight, but this is going to be extended. Um, this is gonna go on for two quarters. Greg, I want to talk more about speculative grade credit in general, and you're

talking about the opportunities in higher rated junk bonds. I'm just wondering about investment grade down grades, the fallen Angel kind of syndrome. We've seen an escalating number of down grades. I'm just wondering at what point that's going to cause forced selling that bleeds out into the top tier of high yield. How worried are you about that? Well, it absolutely will the I mean, we saw Ford get downgraded last week, I think it was last week or two

weeks ago. Um, we're going to see it. This happened in the late nineties early two thousands, where we saw Georgia Pacific Board GM a number of investment grade companies get down graded. With with low interest rate and tight credit spreads, it's not going to have a fundamental impact on the company that doesn't it's not going to increase their bowering costs as long as they can access the markets.

It's going to have a bigger effect in the capital markets for those of us who navigate where we want to allocate dollars. So a big, big amount of a large amount of credit coming from investment grade into high yield, we're gonna have to digest that into the high yield space. Yes, it's a great challenge. Yeah, what's your sense of the financial system, the health of the financial system, maybe say

now versus two thousand two nine. Right, So in two thousand and eight, two thousand nine, we were dealing with UH growth in the subprime loan space that worked its way into UH structured product different types of product. We don't have from our view, we don't have those kinds of accesses UH in UM, the residential space. UM. We thought the commercial mortgage loan space was a little bit extended. UM. And so there's been a lot of development over the

last eight years. The but the financial system is significantly stronger than it was twelve years ago, because we're talking about banks now that have capital levels and excessive eight percent. And a context for that is back in the financial crisis, I think the banking sector was close at four So I think the banks have enough of a shock absorber

to to absorb this much better than they had. And part of this is the FED has responded so quickly to put programs in place to help support commercial paper and repurchase agreements, and it really does support the financial system. So it's got the shock absorbers it needs to help

absorb these um this this crisis. So one thing I've been struggling with just taking a step back the entire there's a theory out there anyway that there's a big shift going on that's getting accelerated by the coronavirus to a digital economy. You're seeing slack, you're seeing zoom all surge, you're seeing sort of anything having to do with online delivery do well. And a lot of the high old market is tied to the old economy and industrial companies

that are struggling arguably the most. What do you say to people who just argue that you have all these over leveraged companies that are going to not be able to grow into their capital structures. It's going to lead to a whole host of defaults with bigger loan losses on them, with loan loss recoveries than during the two thousand and eight crisis. I keep hearing more about that. Is that a real worry? Um? Yeah, the difference between

the new economy and the old economy. The old economy, if if there are assets tied to those businesses, there's value. In the new economy where you've got technology based businesses, there's there's just from a credit standpoint, there's fewer assets, so that your your asset is actually your client base. It's not necessarily your website the technology to support it. Um. But it's a it's a valid point. I mean, it's we've got this whole shift. Every industry is going through

some tectonic shift right now. And I always joke, we never saw we never got a memo when the typewriter left the office back in seven or whenever it left. You know, it's like it just starts to happen and then the typewriter repair shop goes out. So some of this is going to have an impact on literally how we do business. Greg Han, thank you so much for joining us and hanging on there. Greg Han, chief investment

Officer for Winthrop Capital Management. Well, there's been a lot of back and forth between President Trump and General Motors about ventilators. Are they making them, are they being are they charging too much? Let's get the latest with David Walsh, Bloomberg Detroit Bureau chief. So David, give us the latest on what's going on with General Motors and switch pivoting

into the manufacturing of ventilators. Yeah. So they've actually started tearing down the original machine at Ventech, which is GM's partner, turning the machine down at an auto parts plane Cocomo and rebuilding it and really kind of perfecting the called it an assembly line, but it's really a roomful of people assembling these things, uh, the factory that will make these things. So they're they're getting to the final throws of really setting up the whole process to make thousands

of ventilators. And this is important because a vent check which which makes this critical care event or later that can be used for COVID nineteen patients. They were used to making a hundred and fifty maybe a good month two hundred and fifty units, and working with GM, they're going to try to get to ten thousand a month. So this is a huge leap for a company that makes something that, while important, was not here to before

in such great demand. There was some controversy David over General Motors and how much they were charging for some of these Venti leaders, President Trump singling them out and talking about this, where are we on that? So Tom kind of the complete about faith in his press briefing yesterday and said GM is doing a fantastic job. But the written initial controversy was Trump just came out Friday and said they weren't moving fast enough, they were gouging uh.

To be blunt, these are both kind of dodgy claims. UMS were in General Electric are trying to make these and they were saying they help me ready until June, and GM was looked at the start production in mid April. So they're ahead of every other venture out there that that at least has been discussed publicly. GM is actually not really even negotiated with vent Tech negotiates. In terms of the deal, GM is a contract manufacture that could

be paid by Vente. GM is doing the work had cost, and Ventech is charging which they told me the same eighteen thousand dollars a unit that they've been charging all along. What may not be totally appreciated, Your in vent Tech unit is one of the cheaper critical care units out there. Uh,

it's actually a five and one unit. It handles four other respiratory therapies that you need for these patients when the other ventilators are just that that are on the market are just ventilators, and you have to buy the

other four pieces of equipment separately. So there's some talk that maybe that wasn't totally appreciated by the President when when he started compointing about price, but he seems to be happy with everything now because two days after his ranch, the kind of events, So David, just you mentioned mid April, give us a sense of kind of the ramp up here in terms of timing number of units of production.

What's the best guess at this point. I think when they start producing in mid April, it's going to be pretty small numbers. Right now, GM has three people working on that plant and they need to over time get up to a thousands. So they're looking for volunteers who've been laid off with their current plant in Cocomom, Indiana, open for volunteers from the metal stamping plant in nearby Marrying, Indiana,

and they're gonna have to do some new hires. They're gonna have to they're still kind of finishing the process that they used to make these. And keep in mind when engines or cars are assembled, they go along a rolling assembly line and work a sort of you know, they do certain tasks with robotic arms as the car goes by, making ventilators. There's a lot more like making

watches and assembling cars. You have a lot of people sitting at tables with small tools, looking row lens and screwing small electronic components to That's why GM chose this planet's and trying components plant. Yeah, that's what it did before, but it's still a different process GM has never done before. Their parts suppliers. These are all automotive parts suppliers that are doing kind of work with new parts for them, and they're not to validate, just make sure all works.

We'll got starts in mid April. You're going to see pretty small amounts. Maybe by the end of April, you know, you'll be up to hundreds or you know, they're they're really good over a thousand months. So yeah, well so we're not going to see we we were not going to see huge numbers there. The other place we're not going to see huge numbers is just the auto manufacturing in general, how low our auto sales going to be.

What are some of the predictions at this point, So we're probably looking at a March that was pretty well decimated by this. Everybody was saying that first week was pretty good, and then all the shutdowns started hitting. People were avoiding dealerships. Uh, you know that there were towns and states basically keeping people inside except for essential industries and so forth. You know about all of that. So

that's really hammered sales. So it's it's going to be a rough corder when we see see the numbers on Wednesday and going into April, I expect the same thing because you're probably still going to have a lot of people staying home, even if they're allowed to go out in their states, just to avoid contact with others. David Wals, thank you so much for being with us, and all the best to you and your family. David Welch, Bloomer, Detroit Bureau Chief. Thanks for listening to the Bloomberg P

and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa A. Bram Woyds. I'm on Twitter at Lisa A. Bram Woit's one before the podcast. You can always catch us worldwide on Bloomberg Radio