Hey everyone and welcome back to another episode. We are clearly in some unprecedented times, right now, with the Corona Virus and COVID-19, and we wanted to take some time and talk about the data that we’re tracking, some of the numbers we’re seeing how this impacts the economy and really all the trickledown effect to everything else. It is Monday, April 13th, and we’re seeing millions and millions and millions of jobless claims that are being filed each week. So that doesn’t necessarily mean that’s going to equate to the unemployment rate in the United States, but it certainly ties in, I think the unemployment’s going to reach great depression percentages. And just as a reference, the great depression percentages ranged from 15% in 1940, which was the tail end of the great depression. And on the high end, it was 25% in 1933. So those are staggering numbers clearly, very different times back then. But what we’re seeing is just astronomical in terms of jobless claims each week. And when you have 50 million wage earners in America, out of work, that’s certainly going to affect most businesses and real estate.

I think banks are going to have massive defaults on their mortgages somewhere in the vicinity of about 50%, that’s home mortgages, commercial office space, strip malls, et cetera. We’re obviously seeing a lot of these small businesses having to close their doors. That’s clearly going to affect landlords as well as folks that have lost their job, can’t pay their mortgages, etc. The other thing that’s interesting is a lot of the courts have shut down. So evictions are on hold and in some sectors, and we’re not going to see these numbers for months and months. And I’m guessing there’s probably going to be a backlog, an additional strain on the court system once things start to reopen.

Let’s talk about inflation and what happens when trillions of dollars of money gets flooded into our economy in a relatively short period of time. Well, we know inflation quickly erodes the real value of the local currency as the price of goods increase. In some cases, people tend to minimize their holdings within that currency and switch to more stable currencies. And the negative effects of inflation include an increase in the opportunity cost of holding money. So you have money that’s sitting in a bank account earning less than 1% and you’re in trouble. What will be interesting to see is how the uncertainty over future inflation impacts human behavior. It might discourage investment in savings. And if inflation is rapid enough, we’ll see more shortage of goods as consumers begin to hoarding out of concern, that prices will increase in the future. Just like we saw with many household items, including toilet paper, paper towels, flour, etc.

So currently department stores represent about 60% of the anchor space within malls today. And I predict that a large percentage of those stores will start to close in the upcoming years. It may get as high as 50% of stores in those malls. So that could be a Macy’s just like we saw with the circuit cities. And a lot of those circuit cities were obviously standalone, but the department stores are certainly in trouble with the expansion of Amazon convenience. And now everyone’s in their homes, probably ordering more from Amazon and the other online outlets. I believe the construction and labor costs will go down significantly. Once we’re on the other side of this, which includes a ground up development capex projects. And also with the amount of jobless claims out there and unemployment rising, there will clearly be an impact on salaries and costs of salaries, cost of labor across the board, which will go down. Another interesting sector to keep an eye on is live events, and that could include sports, or it could include concerts. And no one’s really sure when people are going to go out to concerts again, when the promoters are going to put on concerts again, and what that looks like. And one of the big questions is if you’ve got a 10,000-seat venue and you need to put 2000 people maximum in that 10,000-seat venue, but you have most of the expenses associated with a 10,000- seat venue, how on earth do you make money? How do you break even? And the answer is you probably don’t. So I think everyone’s trying to rethink that part of the business. I’m not sure when they’ll be another 50,000-person event, whether it’s a festival or big sporting event. Movie theaters is another one that’s interesting.

So if you’ve got two or 300 people in a movie theater on any given Friday night and that changes, and you begin to cluster people throughout the theater, maybe in groups of six or eight or four or whatever that is, you’re reducing the capacity of that theater drastically, the number of tickets you can sell. My guess is the movie theater business was probably running on somewhat tight margins. So you’re slashing the income. Maybe your expenses have decreased because of staffing and things like that, but that’ll be really interesting to see what happens with movie theaters as all of this shakes out. And obviously the government’s going to provide a bunch of stimulus to the real estate industry. That’s through soft monies, grants, incentives, loans, etc., small business owners. Imagine being a restaurant owner operating at a very low profit margin. And all of a sudden you can’t sell drinks. You can only do take out or delivery. Imagine being a bar during this time with small margins, you can’t deliver that many drinks. It’s just not possible versus a packed bar. So restaurants are clearly going to be negatively affected by this. I would imagine many small businesses and restaurants are closing during this whole time unfortunately. Let’s talk about interest rates. I think interest rates are going to stay low for the next several years and maybe even as low as a half percentage. And of course they’ve been low the past few years. So if interest rates

continue to stay where they are, that’s great news for real estate investors that use leverage for their investments.

I think once the stimulus checks have been sent out and started to be processed within the economy, I think there’s going to be a spike in certain retail, whether it’s people buying televisions or computers or things like that that might be Amazons or best buy and stores like that. And a couple more things on the banking side, first was chase announced that they were tightening up their loan parameters for single family home loans. And prior to this, you could put less than 20% down and have less than a 700 FICO for new buyers. So that’s out the window. Now, now it’s a, from 20% minimum down and at least a 700 FICO for new home buyers and Wells Fargo announced that they would no longer accept applications for home equity lines of credit.

So let’s talk about who’s in trouble right now in some of the different sectors. Clearly small businesses are very much impacted by this, especially those with very thin margins. The hope flipping business, a lot of that hard lending has dried up almost overnight. Single family homes, we talked about the requirements for new homeowners. Now that’s clearly going to trickle down to renters, right? So if you were able to buy a home prior to this, and now you can’t, your only option really is to rent. Offices and office buildings across the board are empty. So if you’re the owner of that segment of real estate in the office space, your business is in trouble. Airbnb, hotels and tourism industry have been absolutely decimated and retail or all non-essential retail are vacant. So essentially companies like restaurants are seeing a 50% plus loss in revenue. And although their expenses have gone down, they were still running on very, very tight budgets.

Overall, we are very bullish on affordable housing. And I think when we come out on the other side of this, whether it’s six months from now or three months or 12 months, honestly, I think it’s going to take a few years for a lot of this really to shake out. But I think the affordable housing business as a segment is going to be stronger than ever, and we’ll see more demand in that space. So I hope everyone stays positive in these incredible times, have some empathy for your small business owner who’s probably going through some very difficult times. Help your fellow neighbor, stay safe and until next time.


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S P E A K E R | I N V E S T O R | P O D C A S T E R

Andrew is a founder and Managing Member of Four Peaks Capital Partners. He oversees the company’s acquisitions, asset management, and investor relations. He also co-directs the overall investment strategy along with Mike Ayala. He brings to the company over 10 years of experience in general management and new business development

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