John Raoux/AP Photo
Unsanitized-062420
A commercial property in Orlando, Florida for lease, which is likely to be a permanent condition, as commercial real estate demand slips.
First Response
One of these days, either the horrors of the economy we’re hurtling toward without more federal relief will dawn on policymakers (“it’s a shock unlike anything we’ve ever seen,” said outgoing White House economist Kevin Hassett) or enough Americans will have trouble breathing (see below for the mass herd immunity experiment we’re undertaking) that Congress and the administration will get around to setting a commission to consider the study of doing something.
Sometimes news of those talks filter out. Jeff Stein reported yesterday that Trump likes the idea of another round of Trump checks, but some of his advisers want it to be smaller and more targeted. (see Dean Baker on how the economic stimulus effect of the checks is muted.) The unemployment insurance boost is worth about 9 times more than the one-time check to anyone on it for the full four months, but that accidentally bold policy is so loathed by Republicans that it needed to have been put in with an automatic trigger to preserve, and that wasn’t on the table. I fear it’s been written off despite continued need.
As long as stocks and investments are relatively stable, there’s not going to be pressure on the kind of people who own stocks and investments to tell Congress to do something. That’s fatalistic but also the way Washington works. However, there is one investment about to completely collapse, not just now but in an enduring, forever fashion. That would be commercial real estate. And sure enough, that’s what our bipartisan coalitions are busy writing letters about.
Read all of our Unsanitized reports
This letter, signed by 105 House members of both parties, spans the ideological gamut from Devin Nunes and chair of the House Republican campaign arm Tom Emmer to vice presidential hopeful Val Demings and co-chair of the Congressional Progressive Caucus Pramila Jayapal. This is not a naturally forming group on just about anything.
They write to Treasury Secretary Mnuchin and Jerome Powell about the $540 billion commercial mortgage backed security (CMBS) market. For context, just the subprime portion of the residential mortgage backed security (RMBS) market was several trillion dollars, adding $1 trillion per year in the peak bubble years of 2005 and 2006, but anyone rich losing money anywhere is a problem, apparently. The argument is that the CMBS structure prevents loan modifications (we heard this with residential mortgages in the financial crisis and it wasn’t really true then), making default the only option.
The CMBS delinquency rate was 7.15 percent in May; in April it was only 2.29 percent. For “lodging” like hotels and motels it’s up to 19.13 percent. For the moment, temporary supports are preventing large numbers of people from skipping out on their rent (although David Silberman at the Prospect today explains that there’s plenty of expectation of a no-money-for-the-rent future). But retailers and shop owners are skipping rent left and right.
We’re likely to see a permanent contraction of commercial real estate, in fact. A shift to working from home will not only close offices, but be a major problem for the sandwich shop by the office and all the other businesses that serve commuters. The accelerated rise of e-commerce will force further shrinkage of the commercial real estate sector. Maybe one-third of the nation’s malls could be closed by next year, according to one report.
So requesting that “the Federal Reserve devise a relief plan for these borrowers,” the ask from these bipartisan lawmakers, doesn’t make much sense to me. There just isn’t going to be as much commercial real estate. Some of these CMBS are going to fail; for the investors those are the risks they signed up to take. And the Fed is primarily interested in liquidity; loans aren’t going to pay the rent.
This is a huge problem for one bystander, the congressmembers point out. “Surrounding property values and state and local tax revenues will plummet, worsening the recession, and removing critical revenue from local communities.” That’s true and it’s likely to be permanent. This structure that helps fund government services is being undercut, probably permanently. It’s the ultimate stranded asset, and cities are holding it.
Fortunately the Fed already has a program set up for that: the Municipal Liquidity Facility. The help needed here is for local and state governments deprived of tax revenue. They need most of the money cannon aimed at them, with long-maturity or endless-rollover bonds that are theoretically “loans” but functionally grants. Or Congress needs to awake from its slumber and provide the grants themselves. I don’t care how it’s done, but having the Fed give loans to commercial real estate holders so they pay their property taxes isn’t sustainable amid permanent revenue loss and an economic shift.
The letter talks about “temporary liquidity deficiencies.” They’re not temporary. And until cities and states figure out a new model, they’re going to feel the greatest pain here. The answer to the commercial real estate crash is to fill local budgets with lots of money.
South by Southwest
Trigger warning: if you don’t want to hear a pessimistic Dr. Fauci skip this section. “The virus is not going to disappear,” he said in testimony before the House Energy and Commerce Committee on Tuesday, and the main epicenters of the spread right now are dead-set on proving him right.
Case counts hit a daily high in Arizona and California, with Los Angeles’ top health official saying that it’s “highly likely” that mass protests are responsible for at least some of the spike. The virus doesn’t account for your gathering being righteous as it hops from host to host. The government, in one of those “big brain guy tapping his temples” meme moments, is poised to pull funding for testing sites in troubled states like Texas, following the Trump credo of “no tests, no positive cases.” Unfortunately for Trump, Arizona, Arkansas, California, North Carolina, South Carolina, Tennessee and Texas saw record highs in hospitalizations—the bodies showing up unable to breathe are harder to falsify. Houston’s Childrens Hospital is now accepting adult patients to keep up with demand.
Florida is an innovator in juking the stats, with the former lead COVID data scientist alleging that the state will soon begin to slowly drop cases and deaths. I’ve said repeatedly that the statistics are at best conjectural.
We could get a vaccine by the end of the year. It’s going to be an awful ride until then.
Days Without a Bailout Oversight Chair
89. The junk bond market is rising at its fastest rate ever, with $200 billion sold to date in 2020. “You get an invitation to a party from the Fed, Treasury and Congress -- they offer to pick you up, take you home and bring you breakfast in bed the next morning,” said one bond portfolio manager. Total corporate bond issuance could double last year’s total, and concerns of an asset bubble are rising. One-third of companies have debt service costs larger than annual revenues. There’s a cluster of these zombie companies in the fossil fuel industry, which looks to be in drastic decline.
This is something the bailout oversight chair could hold a hearing about!
Today I Learned
- Far from just not stopping hospital mergers, the pandemic is facilitating them, as dominant networks scoop up struggling rivals. (Axios)
- We completely deserve to have an EU travel ban thrown at us, Americans are unsafe right now. (New York Times)
- The Center for American Progress tacks left with a proposal for emergency Medicaid for the unemployed and uninsured. (CAP)
- Black Americans are four times likelier to be hospitalized for COVID-19 as whites. (Associated Press)
- The disproportionate sickness rate among Blacks could have something to do with mass transit. (Mother Jones)
- Barcelona opera house reopens to a packed house of plants. (CNN)
