Ethan Penner Sees Unprecedented Period of Economic Instability Until Vaccine is Found

By: Mosaic Real Estate Investors
LOS ANGELES - May 7, 2020 - PRLog -- 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, according to Ethan Penner, a leading real estate finance expert.

"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," said 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.  While there are approximately 100 candidates under review and hope that one can be developed as soon as the fourth quarter, which would be an historically rapid outcome, expert consensus is that it will take at least many more months before an effective vaccine will be approved and delivered for broad public use.

While states are beginning to lift restrictions in order to open up their economies, the initial steps are very small and the buy-in of the population very tepid, indicating that it will take some time before most Americans feel safe to resume their normal activities, including shopping, dining out and traveling.  According to a recent Washington Post/University of Maryland poll, only 31 percent of respondents believed "the worst is behind us" and 69 percent said retail shops should not be allowed to open.  "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," said Penner.

"The health of the commercial real estate market is directly related to the health of the economy," added Penner.  "We are in the midst of an historic liquidity crisisand a market dislocation resembling the most extreme ones of modern times, including the 2008 subprime mortgage crisis and the market downturn of the early 1990s that is commonly referred to as "the Savings & Loan Crisis." Investors, developers, commercial and residential landlords are all facing the potential for significant financial losses."

Chief among those that will experience 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 simply not the way things work. Those borrowers, happy to take the gamble during good times and harvest the financial benefits associated with that strategy, are faced with losses and even the prospect of losing assets entirely unless they obtain capital to bridge the divide. This situation is not restricted to property owners, but also to private lenders who utilized bank warehouse facilities to leverage their returns.

"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. 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. "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," said Penner.

At the same time, for those positioned to invest, there will be ample opportunity to invest into assets that will appreciate in the years to come, according to Penner.

"Overall, most properties that were good investments before Covid-19 are going to be solid bets after recovery. This crisis will likely serve to exacerbate the trends that were already in place in separating the quality assets, that are positioned to thrive, from the poorer-positioned ones which may very well experience significant levels of demise."

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Page Updated Last on: May 15, 2020



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