Global pandemic. The third estimate of Fourth Quarter GDP growth was 2.1% and the Federal Reserve Bank of Atlanta projects First Quarter GDP growth to be -0.3% but as noted on their website in big red letters, the estimate “does not capture the impact of COVID-19 beyond its impact on GDP source data and relevant economic reports that have already been released.” According to the Bureau of Labor Statistics, changes in total nonfarm payroll in the past three months were 214,000, 275,000, and -701,000, respectively, an average of -71,667 and well below the average of 177,750 for the 12 months prior. While the economic effect of COVID-19 is slowly filtering into the payroll numbers, the exponential rise in weekly jobless claims from 281,000 (3/19) to 3.3 million (3/26), 6.6 million (4/2), 6.6 million (4/9), and 5.3 million (4/16) is the clearest coincident indicator of the devastation that is taking place in the US economy. The 10-Year Treasury Note yield plummeted from 1.919% on December 31, 2019 to 0.698% on March 31, 2020; however, with the FOMC cutting the federal funds rate to zero, the spread between the yield on the 3-Month Treasury Bill and the 10-Year Treasury Note actually rose from 36 bps to 55 bps in First Quarter.
Unprecedented! The COVID-19 (coronavirus) pandemic that effectively shut down economies across the globe weighed heavily on nearly all asset classes during the First Quarter, despite herculean fiscal and monetary policy steps taken to help offset the historic economic drag expected to result in the coming year. The dispersion of returns was narrow between the regions in the Index, as shelter-in-place (SIP) mandates were instituted in most countries to slow the rate of infection. Yet underlying performance was more reflective of how COVID19 might affect fundamentals, with a tenants’ ability/willingness to pay upcoming rent seemingly the biggest driver of returns. In particular, the more pandemic-resistant sectors (data centers, logistics, self-storage) outperformed those more directly and negatively affected by the shutdowns (retail, hotels). Indeed, employee furloughs, reduced compensation, line of credit drawdowns, withdrawn guidance and dividend reductions were prevalent among this latter group given the downward pressure on cash flows. It is often said that real estate houses the economy , which underpins the lagging performance of property securities as global growth came to a screeching halt. Yet the downbeat returns seem to imply that property owners will absorb the entirety of pain associated with the shutdowns (rent forgiveness for all) despite tenants’ legal obligations to pay rent, even in pandemic. Rather, the more likely outcome will include shared pain among all parties (rent forgiveness for some), which suggests property securities may be uniquely positioned to outperform if cash flows end up better than these downtrodden expectations.