Sunday Digest
Edition VI

Perhaps the higher powers are saddened by our current state of chaos. Or maybe this thick layer of clouds is actually mother earth enveloping us in a warm hug, empathic towards our suffering. I prefer to believe the latter. Either way, June Gloom seems to have come early this year.

Here is what I saw this week:

1. The virus remains out of control and very much alive. There is no vaccine, cure, or effective treatment protocol for COVID-19 in sight yet. In positive news, the rate of infection has abated in some parts of the country and the world, due in large part to social distancing, stay-at-home orders, and more readily available personal protective equipment.
2. Certain businesses have commenced re-opening, though there is no uniformity to this across the country. The clamoring for more progress towards “opening” grows louder by the hour.
3. Last week, the US Stock Market moved as if the worst was behind us and the future was looking great. Many gamblers and stock market investors share a common trait – toss the dice and hope lady luck appears.
4. The letter “L” was added to the great debate amongst economists, central bankers, business leaders, and analysts forecasting the shape of economic recovery – as if U, V, and W weren’t enough for us to consider! L-shaped is now the least optimistic view and would represent a steep decline to a floor that could last for many years. This is somewhat reminiscent of the extended period of stagflation we experienced in the 1970s. The economy during that period was stagnant, while inflation raged. Could we see an L-shaped recovery that is a coupling of stagnation and deflation? Of course. This potential exists because of that letter “T” that I mentioned last week.
5. Technology! That’s what the letter “T” represents. The Fourth Industrial Revolution is upon us – the Great Technology Revolution. The effects of technology on all aspects of our lives is profound and immeasurable. AI, robotics, automation and the internet have become indistinguishable from our physical lives. We are able to produce more goods and provide more services, even in a global lockdown, with fewer people than ever before. There is a grim reality here – there may not be an equal number of jobs available upon re-entry as there have been lost. Additionally, the price of goods and services will likely decline as more goods are produced and more services are provided at lower rates due to the reduced labor required.
6. Remember, the world has changed. Warren Buffet said it, and so did I. Regardless of who called it first, a changed world provides both hardship and opportunity. My preference today is to focus on opportunity.   
7. Change brings about abundant opportunities for those that can spot them. Below are a handful for real estate investors to keep an eye on:
   1. WeWork won’t work for rescuing office buildings again. Millions of square feet will be vacated, and the pain will be felt by owners and lenders. This pain will translate into opportunities. Real estate investors will balk, and lenders will recoil at the concept of providing financing for buildings that are suffering huge vacancies. Prices will decline, without regard for location, thus creating superior opportunities to purchase great buildings, in the best locations, at what should be very attractive prices. 
   2. In this changed world, employees will request private, enclosed workspaces with proper ventilation that includes fresh and re-circulated air to inhibit the spread of bacteria. This will translate to companies requiring more office space, not less. This demand will, over time, absorb much of the vacant space, and rental rates will not only re-bound, but will increase. The win will go to office buildings that are retrofitted with fresh air systems and equipped with elevators that limit the number of passengers and operate with verbal instructions instead of button pushing.    

   3. More than any other time in modern history, companies will seek to occupy their own buildings, enabling them to provide a safe working environment that is controlled and not shared with other tenants. Prices for existing 100% vacant buildings will accelerate as this becomes the norm. New construction of owner-occupied buildings will flourish.
   4. Enclosed shopping malls are in the thralls of a death rattle. Retail shopping was already in transition before COVID-19, thanks to the convenience of digital purchasing, which led to declining sales at brick and mortar retail stores. Not long ago, I wrote an article on this subject, arguing that brick and mortar real estate was not dying, just changing. Shopping is as much of a necessity as it is a social experience. In the midst of our Great Technology Revolution, retailers require far less space for inventory. Consumers can view offerings on their computers and cell phones, buy, and receive same day delivery of their purchases. Street level retail stores will soon flourish as opportunities for brands to create social experience centers – I imagine this as smaller stores where consumers can see, touch, feel & interact with what they’re buying. Shopping in enclosed and densely populated mega buildings with no windows and re-circulated air will continue to decline in popularity.   
   5. Demand for traditional street retail space will deplete vacancy and rents will rise. As millions of square feet are emptied in enclosed shopping malls, owners will default and many of the retail properties will be reclaimed by their lenders. Bargain pricing will commence as lenders seek to recover their losses. For investors with the foresight to purchase the best properties in great locations at substantially discounted prices, the upside is clear.

I had planned a deep dive into the theories of inflation and deflation for today’s letter but opted to press pause on the high-level theoretical discussion this week. Perhaps we will see science prevail over politics, and clarity prevail over confusion in the days to come. Here at Christina, we remain empathic to the suffering of our tenants and vendors, without whom we could not function and prosper. We are fortunate to be located and operating in the Westside region of Los Angeles, a dynamic market that has forever seen demand outweigh supply and look forward to the opportunities brought upon by this changed world. 

Warmest regards,

Lawrence N. Taylor

President