COVID-19 PANDEMIC: OREGON & US (Updated 6/9/2020)

STATE OF OREGON CONSIDERATIONS

The state of Oregon was one of 42 states that went under some form of “stay-at-home” or “shelter-in-place” ordinance to promote extreme social distancing, which was recommended by scientists as an effective way to reduce community transmission, flatten the growth curve and create a manageable situation for the medical community. All businesses that deemed non-essential were asked to close, and residents were supposed to stay in their homes except for daily exterior exercising and trips for vital supplies at grocery and drugstores. Restaurants, bars and cafes either closed or operated with take out or delivery services only.

The state was quick to aggressively protect the residential and commercial renters as summarized by the following events: 

• On March 22, 2020 OR Gov. Kate Brown put a 90-day statewide moratorium on residential evictions.
• On April 2, 2020 OR Gov. Kate Brown put a 90-day statewide moratorium on commercial evictions.

With the State’s protection from evictions and with a large portion of the economy unable to work, it is anticipated that losses will be front loaded, and then a period of recovery until the economy can regain stabilization. The following summarizes significant COVID-19 related actions in the State of Oregon.

• On April 7, 2020, OR Gov. Kate Brown extended a statewide ban of dine-in service at restaurant and bars. The original executive order occurred March 17, 2020 and was set to expire in the less than one week from this extension, which is indefinite, remaining in effect “until terminated by the Governor.” 
• On April 8, 2020, OR Gov. Kate Brown extended the closure of all Oregon public schools through the end of the academic year.
• On April 23, 2020, Governor Kate Brown announced that she will be lifting her order delaying non-urgent procedures for health care providers, as long as they can demonstrate they have met new requirements for COVID-19 safety and preparedness. Hospitals, surgical centers, medical offices, and dental offices that meet those requirements will be able to resume non-urgent procedures on May 1.
• On May 5th, Gov. Kate Brown announced limited opening of some state parks and outdoor recreation facilities for day use.
• On May 15th, 28 counties were approved to enter Phase I of the Governor’s framework for Building a Safe and Strong Oregon. Phase I allows for the following to operate if they can comply with health and safety guidelines: restaurants, personal service businesses, retail businesses, gyms & fitness, and local gatherings up to 25 people.
• By May 28th, all Oregon counties had received approval to enter Phase I except Multnomah County.
• On June 4th, Gov. Kate Brown announced 26 counties have been approved to enter Phase II over the next week. Phase II includes (subject to health guidelines): recreational sports; pools; venues like movie theaters, bowling alleys, and arcades; some additional in-office work; social, civic, and faith-based gatherings can meet in larger, physically-distanced groups.
• As of June 5, 2020 the state of Oregon had 4,474 confirmed COVID-19 cases, and 159 deaths, which is 40th among US states for total confirmed cases.

The following map summarizes the status by county within the State of Oregon:

COVID-19 PANDEMIC SNAPSHOT

US Hotspots - In the US, New York, Illinois and Washington state emerged as the early hotspots. Although Illinois and Washington appear to have avoided mass community spread, COVID-19 grew exponentially in New York, which accounts for about 20% of all confirmed US cases. The following tables summarizes states with the highest cumulative cases.

Last updated: June 5, 2020 at 12:00 p.m. ET; Source: CNN health via Johns Hopkins University Center for Systems Science and Engineering

Current Global Epicenters - The US leads all nations globally with 1,875,402 confirmed cases and 108,278 deaths. Brazil (614,941), Russia (449,256), the United Kingdom (281,661), and Spain (240,660) round out the top 5 nations in total confirmed cases. Mainland China where the virus originated has the 18th most confirmed cases at 83,027; however, it is largely believed numbers out of China are not accurate.

Last updated: June 5, 2020 at 11:00 p.m. ET; Source: CNN health via Johns Hopkins University Center for Systems Science and Engineering

US REACTION TO COVID-19

The Fed - The Federal Reserve is using all monetary policy at their disposal to help prop up the economy. This includes ratcheting down the benchmark interest rate to 0% and going all-in on quantitative easing to ensure there is not a liquidity crunch. Historically low lending rates are anticipated to be ongoing for the foreseeable future. Monetary policy by the Fed and lending policies by banks, credit unions, life companies and the CMBS are not the same. It is anticipated that lending for certain asset types will be impaired for a period including hotels, casinos, and retail.     

Stocks - After peaking in mid-February at above 29,500, the Dow Jones Industrial Average experienced tremendous volatility and a sell-off in reaction to the onset of the COVID-19 pandemic entering the bear market territory and bottoming out at 18,214 in the last week of March 2020. The strong sell-off corresponded with a comparable increase in cash holdings and government securities. Subsequently, there was some volatility; however, overall stocks have gone on an outstanding rally, with the Dow now at about 27,300 (as of 6/9/2020), above where it stood one year ago at just under 26,100. The sharp growth in recent weeks are in reaction to the restarting of the economy, an unexpected rebound in US jobs and increased optimism for effective management of this disease.  

US Government Stimulus - Although initially slow to react, the US Government has aggressively passed emergency legislation to protect the US economy. This is a brief summary of the Government’s countermeasures. 

• Phase 1 (the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020) was $8.3 Billion to promote coronavirus vaccine research and development that was signed into law on March 6, 2020.
• Phase 2 (the Families First Coronavirus Response Act) was about $104 Billion for paid sick leave and unemployment benefits for workers and families that was signed into law on March 18, 2020.
• Phase 3 and the most recent stimulus known as the Coronavirus Aid Relief and Economic Security Act (CARES) passed in the Senate March 25, 2020, passed in Congress the next day, and then was signed by President Trump that same day. This stimulus is of unprecedented size and scope. The original bill included $500 Billion for direct payments to Americans, $208 Billion for loans to major industries and $300 Billion in relief funds for small businesses. This bill was further expanded growing to what is believed to be around $2.0 to $2.5 Trillion in the version unanimously passed by Congress.
• Phase 4 does not yet exist, but there are indications that another major stimulus may be necessary to stabilize the economy and keep the economy from slipping into a deep recession. The scope and cost of such stimulus will become clearer as events unfold. On April 23, 2020, the House passed a $484 Billion spending package, which had already passed the Senate, and was signed by President Trump on April 24, 2020 .The bill appropriates an additional $320 Billion to the Paycheck Protection Program passed in March and also includes $60 Billion for the Economic Injury Disaster Loan which supports small businesses, $25 Billion for virus testing, and $75 Billion allocated to hospitals.

Global Stimulus / Recession - Similar stimulus efforts are occurring by governments globally to combat the impacts of the COVID-19 pandemic. It is largely accepted that we are either in or about to be in a global recession, which was imminent prior to the pandemic. The impacts of the pandemic will put the US economy into a recession. The depth and overall economic impact of that recession will be playing out over the coming days, weeks and months based on our ability get the economy restarted before a deep nasty recession smashes into the US and global economies.  

US Outlook - Recently President Trump has presented national guidelines for opening the country. The guidelines are implemented on a state or local level, with a phased approach. Phase I, for states that satisfy gating requirements including declining cases and availability of testing, includes the following recommendations:

• Vulnerable individuals continue to shelter in place
• All individuals maximize physical distance in public; socializing in groups of more than 10 people where physical distancing is not possible should be avoided.
• Minimize non-essential travel.
• Employers should continue to encourage telework when possible and feasible, close common areas or enforce strict social distancing protocols.
• Schools and organized youth activities that are currently closed should remain closed.

The following map shows the various stages of re-opening that is occurring throughout the country.

Last updated: June 5, 2020 ; Source: New York Times

US COMMERCIAL REAL ESTATE HIGH LEVEL FINDINGS.

The following high level findings for the US commercial real estate investment market are largely the result of a piece entitled COVID-19 Valuation Considerations: For Institutional Commercial Real Estate in the US dated April 22, 2020 and authored by Matthew Ansay, MAI, CRE – National Valuation consultants, Jay Marling, MAI, CRE, FRICS – Capright, David R. Walden, CRE, FRICS, MAI, CCIM – NPV Advisors, Jeffrey Walker, MAI, CRE – US Realty Consultants, Jerry Witte, MAI, CRE, FRICS – Qval Property Advisors.

Introduction - Commercial Real Estate (CRE) both supports and is supported by an enormous financial ecosystem that is integrated with every economic driver in at least some aspect. The global recession is being accelerated by COVID-19’s ability to paralyze economic fundamentals from supply chains to stocks to crude oil to travel to restaurants to EVERYTHING. At this time nothing can hide from this disease and nothing is safe from being adversely impacted. The COVID-19 pandemic has flipped the CRE industry on its head much like everything else. The degree by which the functionality and value of CRE will be impacted is unknown at this time, and the time it takes to sort it all out could take months to multiple years. The following are high level observations about how COVID-19 impacts CRE.

Reduced Liquidity - Immediate impact to CRE is reduced liquidity. Most all buyers, sellers, and lenders are on the sidelines waiting for clarity creating near-term reduction is supply, demand and sales velocity. Most CRE trades in the current market are anticipated to have pricing reduction caused by COVID-19. 

Buyers & Sellers - Preservation and desperation are likely features of any serious sellers under current conditions. Otherwise, sellers will either ignore low-ball offers or remove it from the market altogether. Serious buyers are either seeking lower risk through quality or to take advantage of cheap pricing from motivated sellers. Really prudent buyers will exercise patience waiting for a huge pricing collapse that is unlikely to occur.   

Underwriting - CRE due diligence is immediately more challenging due to constraints in traveling and property access, and getting technical reports done. As an essential industry, lenders and third-party vendors have largely solved most issues with technical reports (title, appraisal, environmental, condition report, etc.). Underwriting standards are expected to tighten for CRE in reaction to rapid reduction of its liquidity. This is most impactful for assets requiring significant capital expenditures or those in hot spots.

CRE Least Impacted - Most every CRE asset type has adverse value impact by COVID-19. Industrial is anticipated to be one of the leading assets classes, self-storage should fare okay, and multi-family should in large perform after perhaps some initial cashflow issues. Properties with bond-like income qualities, like net leased assets to credit tenants on a long-term basis, are also poised to perform well assuming the tenants are recession resistant.

CRE Most Impacted - CRE assets most impacted by COVID-19 include hotels, retail centers, senior housing, and others heavily reliant on foot traffic demand such as tourism. Construction that is underway risks supply chain disruption that would increase holding costs and potentially impact the enforceability of the leases for pre-leased space. This can impact construction loans, insurance premiums and jeopardization of the project overall depending on when it is halted, for how long and what measures are taken to preserve its integrity. 

COVID-19 has caused a sharp near-term decline in economic activity and sales velocity for CRE assets. As this situation unfolds and we transition from stay at home ordinances, economic activity will offer the opportunity for recovery to begin; however, the potential economic fallout and the ultimate impact on CRE values will be wide ranging and unevenly applied. This issue is set to have profound long-term effects on the CRE industry.

US CRE Conclusion - Near-term uncertainty and the resulting lack of liquidity or bid/ask spread mean that, in many cases, it is too early to justify across-the-board movement in investment rates. While increased uncertainty typically results in more conservative underwriting, a good argument can be made that commercial real estate as an asset class will ultimately deliver superior risk- adjusted returns versus alternative investments. Given the fluidity of the current market environment, it is likely that valuation parameters will remain highly dynamic in the near-term requiring frequent re-evaluation.

COVID-19 PANDEMIC BACKGROUND

There is a worldwide COVID-19 pandemic caused by the novel coronavirus that started in December 2019 in Wuhan, China and has since spread across the globe with over 6.6 Million total confirmed cases and 391,848 deaths (6/5/2020).

COVID-19 - Per the online Merriam-Webster dictionary, COVID-19 is a mild to severe respiratory illness that is caused by a coronavirus (Severe acute respiratory syndrome coronavirus 2 of the genus Betacoronavirus), is transmitted chiefly by contact with infectious material (such as respiratory droplets), and is characterized especially by fever, cough, and shortness of breath and may progress to pneumonia and respiratory failure.

Initial findings of this disease indicated that it is as infectious or slightly more infectious than the flu. More recently there is evidence that COVID-19 might be as much as 3 times more contagious than the flu, largely because people can walk around for days either asymptomatic or with only mild symptoms but can be highly contagious. The novel coronavirus can be passed through water droplets (coughing, sneezing or just breathing) within an approximate 6 feet radius and it can be passed by surface contact (contaminated hand to face – eyes nose & mouth).

The virus has an ability to stay viable for multiple days on surfaces like plastic and metal, and shorter timeframes such as four to six hours for cardboard and paper. There have been instances of what are called “super-spreading events” where the conditions are perfect for spread of the disease such as choir rehearsal in Washington state where 45 of 60 (75%) attendees were stricken with COVID-19 that attended the two and a half hour practice. Research indicates that under the right circumstances the virus can stay viable while suspended in the air for up to 30 minutes.

Death Rates - Based on initial findings and depending on location and health factors associated with the population base, the death rate for COVID-19 is somewhere in the 1% to 2% range. An article from the LA Times reports that a recent study indicates a death rate of 1.38% for COVID-19 infections. The actual rate of death lower (less than 1%) because some 25% of cases are asymptomatic and there are many suspected cases that do not get counted because lack of adequate testing sources. This issue is demonstrated by the graphics to the right that show death rates by age groups. Young people up to 49 years old have very low death rates. The disease is particularly hard on the elder population and all populations that have pre-existing underlying medical conditions, where a much higher death rate is observed in the most vulnerable risk categories. These are population groups that are a priority for protection.  

About 80% of the COVID-19 cases are deemed mild or non-severe. Within the non-severe category, it can range from very mild symptoms to symptoms that top the worst flu you have ever had and take weeks to recover from. Severe cases require hospitalization and often utilization of a ventilator as a life saving measure.

Long Term Outlook / Race for the Cure - In general scientists agree that COVID-19 will not burn itself out; rather, it is here to stay until humans achieve heard immunity or an effective vaccine can be developed, tested, and deployed on a global scale. Even at lightning pace, mass distribution for any effective cure is at least 12 to 18 months out. Fortunately, the disease will likely fall off sharply during the summer and early fall months of 2020, and will re-emerge in hotspots throughout the US during the cooler seasons, which will necessitate enactment of extreme social distancing measures and trace sourcing at localized levels to beat back community spread. Control of the disease will require ongoing changes to our social behaviors, that rapid result wide-spread testing be available to the entire general public, and that medical advancement leads to methods of preventing and treating the disease more effectively to restore the confidence of the general public so that normal economic activities can return.