Office space in big cities might face a reckoning from the coronavirus, but it won’t happen overnight.
That’s because while U.S. urban areas were particularly hard-hit by the pandemic early on, even buildings that are sitting largely vacant now typically have long-term leases in place that put tenants on the hook for rent over roughly a decade.
Building owners often also have 10-year fixed-rate mortgages, which over the past decade have been set at historically low rates, giving property owners more wiggle room to sort through the shocks of COVID-19.
Those are key takeaways of a new report from credit-rating firm Moody’s Investors Service on the future of U.S. office space as a result of the pandemic, which sparked an abrupt need by many companies to set up their employees for remote work.
In short: The modern office isn’t “dead” yet.
But Moody’s does see “heightened risks more in major urban markets,” and in the unlikely event of “sea changes” in behavior by companies looking to eventually shed office space, “a meaningful credit impact” could occur, wrote a team led by senior credit officer Kevin Fagan, in a report released late Thursday.
The team’s finding were based on a swath of factors, including coronavirus cases in major cities and how easily staff in those cities can work remotely. The team also combed through data on office asking rents, lease terms and financing details in billions of dollars’ worth of office loans bundled into commercial mortgage-backed securities (CMBS) deals that Moody’s rates.
After all, the pandemic may have quickly upended daily life, but commercial real estate is built and financed with decades in mind.
To that end, offices not only have became a “second home” for many American workers, but also a significant source of income for bond funds, pension funds and insurance companies looking for steady investments. Office debt now accounts for about 27% — the largest chunk — of commercial property loans in the $548 billion CMBS market, a key source of financing for office buildings, retail properties, hotels and other commercial buildings for decades.
Not all of the CMBS office financing went to trophy towers in major U.S. cities, long viewed as jewels of investment portfolios. But Moody’s traced 60% to buildings in six major metro areas, where both asking rents and COVID-19 cases have been running higher.
“These high-density markets also have the greatest perceived health risk if concerns over the pandemic linger post-coronavirus,” Fagan’s team wrote.
Even so, this chart shows that 37% of larger office leases won’t start to expire until the next four to eight years, while the biggest chunk, 43%, happens even further out, suggesting that landlords have time to adjust to the future of work.
The rise in new U.S. cases, which have already topped 3 million, led Michael Osterholm, head of the Center for Infectious Disease Research and Policy at the University of Minnesota, this week to call for shutdowns again and for reopenings only to happen in a slow, measured way.
Dr. Anthony Fauci said Thursday that the U.S. isn’t doing great at containing the spread of COVID-19, but stopped short of saying parts of the country need to shut down again. Stock investors have been keeping close watch on rising infections too, with the Dow Jones Industrial Average US:DJIA
shedding 360 points Thursday, while the tech-heavy Nasdaq Composite Index US:COMP,
viewed as benefiting from the “work from home” trade, set a fresh closing record.
Meanwhile, pockets of distress already can be seen in lodging properties, where 22% of loans in CMBS deals were delinquent as of June, followed by 17% for retail properties but only 2.2% for office buildings, according to S&P Global Ratings.
When might distress hit offices? The Moody’s report underscored that the working-from-home trend already was gathering steam before COVID-19. That said, office buildings could face a significant test when a burst of expiring leases starts to coincide with the decade’s biggest wave of maturing office loans in CMBS deals. Moody’s pegged 2024 as the start of that wave, when more than $12 billion in loans will come due each year through 2027.
“The looming question,” Fagan’s team wrote, “is how much of this shift to remote working practices will remain once the lockdowns have lifted and companies can safely return to the office.”
U.S. stocks closed mostly lower Thursday, but off the low of the day, as investors sought safety in technology and tech-related investments amid rising cases of coronavirus in states like Arizona and Florida.
A 7-2 Supreme Court decision ruling that a New York prosecutor could have access to President Donald Trump’s tax returns, also was parsed by Wall Street.
The Dow Jones Industrial Average closed 361.19 points, or 1.4%, to end at 25,706.09, but had been down by as many as 544 points at the day’s low. The blue-chip index was weighed down by component Walgreens.
The S&P 500 index lost 17.89 points, or 0.6%, at 3,152.05, after touching an intraday low at 3,115.70. The Nasdaq Composite Index resumed its advance following a stint in negative territory, with the tech-laden index closing up 55.25 points, or 0.5%, at 10,547.75, marking its second record in a row and its 26th of 2020.
The Nasdaq-100 index NDX, +0.82%,
consisting of the largest companies within the Nasdaq by market value, closed up 0.8% at 10,754.59, while the small-cap Russell 2000 index RUT, -1.99%,
more sensitive to the economic outlook, finished off 2% at 1,398.92.
What’s driving the market?
It was a bumpy ride for stocks Thursday, with investors clutching for a handful of technology stocks amid resurgent concerns about the shape of the economic recovery from the COVID-19 pandemic that continues to wreak havoc on the domestic economy.
Investors are betting that large-cap tech names will be the clear winners in the aftermath of the viral pandemic, supported by a heavy dose of stimulus by the Federal Reserve and the U.S. government.
Stocks may have taken a leg lower late-morning after the Supreme Court ruled 7-2 that the president lacks immunity to withhold his tax returns from prosecutors. It was a bit of a “knee-jerk” reaction, said Joe Saluzzi, co-manager of trading at Themis Trading.
“Markets are a bit more friendly to the president and his policies,” Saluzzi said in an interview, “so anything that’s seen as negative to him might provoke a tiny reaction. “
The moves come after a report on weekly jobless claims showed that another 1.3 million Americans filed for first-time employment benefits in the most recent week, below the 1.4 million forecast in the MarketWatch survey, and down from 1.43 million in the prior week.
That keeps intact a decelerating trend since peaking last March, but still marks the 15th straight week of claims of at least a million.
“Initial claims remain very high and the improvement since late March has almost come to a halt,” wrote analysts at UniCredit in a daily research note. “The re-imposition of restrictions in several states facing growing numbers of new COVID-19 cases could have already had an effect,” the analysts said.
The jobless claims report came about a week after the monthly nonfarm-payroll report showed that U.S. economy regained 7.5 million jobs in May and June. That pales compared with the 22 million jobs lost during the first two months of the pandemic.
Against that backdrop, infections derived from the novel strain of coronavirus haven’t abated. Bloomberg News reported that Florida saw records in both new hospitalizations and deaths, while Arizona added 4,057 new cases.
Overall, the U.S. reported more than 58,000 new cases on Wednesday, according to data compiled by Johns Hopkins University, down slightly from the previous day. The country’s death toll stands at more than 132,309.
During a podcast with the Wall Street Journal on Wednesday, Dr. Anthony Fauci, the foremost expert on infectious diseases in the U.S., said that we remain in the throes of the first wave of the deadly pandemic.
“We have never gotten out of the first wave,” he said. “So I wish we would stop talking about waves and just look at the reality of where we are right now. ”
Indeed, cases in California, Texas and Florida, hot spots in this resurgence, also hit new daily record highs on Wednesday.
That said, Florida Gov. Ron DeSantis has encouraged Walt Disney Co DIS, +0.12%.
to proceed with its phased plan to reopen its theme parks starting on Thursday and through July 15. In New York, indoor shopping malls outside of New York City are eligible to reopen Friday, New York Gov. Andrew Cuomo said.
Meanwhile, Treasury Secretary Steven Mnuchin told CNBC during an interview on Thursday that the Trump administration supports a narrower aid package for Americans hurt by the pandemic. Mnuchin said that the White House backs a further extension of the Paycheck Protection Program, which has been extended to Aug. 8, and stimulus checks for individuals but at lesser level than the initial phases of recovery aid.
“The market has priced in the reality that virus is something we have to live with, mortalities are under control, and we’re not going back to a full societal lockdown,” said David Bahnsen, chief investment officer of Newport Beach, Calif.-based The Bahnsen Group, with over $2.25 billion in assets.
“The market’s much more focused on the Fed,” Bahnsen said in an interview, “which is not necessarily a good thing but it’s sure hard for the market to form an opinion against risk assets with the liquidity and tight spreads that the Fed has produced.”
Shares of Bed Bath & Beyond BBBY, -24.49%
sank 24.5% after the retailer said it would close 20% of its stores.
U.S.-listed shares of Hexo Corp. HEXO, +5.93%
rose by about 6% Thursday, after the Canada-based cannabis company said it would start selling medical cannabis in Israel, marking the first time its medical cannabis products will be available outside of Canada.
Shares of Allegiant Travel Co. ALGT, -7.68%
slid 7.7% even though the company said its bookings averaged $4 million a day, “exceeding” its expectations.
Tesla Inc. TSLA, +2.07%
shares powered 2.1% higher on the back of a Wedbush analysis suggesting the car company may see a “snapback of demand.”
Shares of Harley-Davidson Inc. HOG, +0.62% rose 0.6% Thursday after the motorcycle maker disclosed that it will cut about 14% of its workforce as part of a restructuring, and said Chief Financial Officer John Olin is stepping down, effective immediately, after 10 years in the role.
The report, issued by sustainable-investing advocates Ceres and other partners, including power industry participants, found that power sector CO2 emissions decreased 8% between 2018 and 2019, while SO2 and NOx emissions decreased 23% and 14%, respectively. During that time, U.S. GDP rose 2.3%, meaning that an expanding economy pushed utilities to churn out more power yet because of the energy mix, emissions were down. Widening the snapshot, from 2000 to 2019, CO2 emissions decreased 28% while GDP grew 45%.
“While experts expect an even more dramatic plunge [in emissions] in 2020 due, in part, to the COVID-19 pandemic, it will be critical to ensure we continue the momentum in decarbonizing the power sector,” said Dan Bakal, senior director of electric power at Ceres. “Utilities should deploy zero-carbon resources and electrify other sectors in order to accelerate the pace of decarbonization as the economy recovers and energy demand increases.”
Cutting emissions is a key focus of public-health advocates and those working on policy and private-sector shifts to slow the effects of man-made climate change.
In 2019, renewables and other zero-carbon resources, led by nuclear power, generated more than 35.7% of U.S. electricity. Natural gas NG00, +0.27%
, a fossil fuel that emits about half the carbon as coal but has its own detractors, was the most used source at 38.4%. Coal provided 23.4% of the nation’s electricity, down from about 50% a decade ago.
Last year, zero-carbon resources, including nuclear, renewables and hydro, generated 36% of U.S. electricity, making it the second-leading source of power generation after natural gas. Non-hydro renewable generation, which includes wind, solar, geothermal, and biomass, has more than doubled since 2000. Renewables provided more power than coal for the first time last year, according to the Energy Information Administration.
Natural gas is often still criticized by industries pushing for more solar, wind and other zero-carbon renewable sources. Utilities maintain that they need to keep using natural gas because the wind and the sun are too unreliable and because utilities are slow to invest in energy storage.
A report in June by the University of California, Berkeley, said that by 2035, the U.S. electric grid could get 90% of its power without greenhouse gas emissions while lowering electricity rates. To do that, the country would have to increase its use of renewables, energy storage and transmission lines while closing all coal plants and cutting natural gas use by 70%.
The benchmarking utility analysis is the 16th edition of the report since 1997. The analysis is a collaborative effort between Ceres; Bank of America; power producers Entergy ETR, +1.09%
, Exelon EXC, +0.40%
, and independent energy company Tenaska; as well as the Natural Resources Defense Council (NRDC). It is authored by M. J. Bradley & Associates.
Increased ambition from power sector companies is critical to decarbonization, and to succeed in tackling the broader issues relating to the climate crisis, say Ceres and other advocates. Some of the highest emitting power companies have recently made voluntary commitments to reduce their emissions to net-zero by 2050. Over the past two years Southern Company SO, +0.64%
, Xcel XEL, +0.26%
, Duke DUK, +0.76%
, Dominion Energy D, +1.34%
, NRG Energy NRG, +1.34%
, CMS Energy CMS, -0.15%
, DTE Energy DTE, +0.75%
, and Arizona utility APS have all committed to achieving net-zero emissions by 2050.
“We are on track to meeting our 2030 climate commitment by transforming our generation portfolio to cleaner resources and investing in our utility-owned nuclear facilities,” said Mike Twomey, Entergy’s senior vice president of federal policy, regulatory and government affairs.
SYDNEY/NEW YORK (Reuters) – Asian stocks dithered on Wednesday as an increase in new coronavirus cases in some parts of the world cast doubts over the economic recovery while oil prices eased on oversupply fears.
MSCI’s broadest index of Asia-Pacific shares outside Japan were a tad lower after hitting a 4-1/2 month high just on Tuesday.
Chinese shares flickered between green and red. Australian shares were down 0.4% as were indexes for New Zealand and South Korea. was off 0.1% and Hong Kong’s was slightly firmer.
E-mini futures for the S&P 500 added 0.18%.
Overnight, U.S. stocks fell, halting a five-day winning streak by the benchmark S&P 500 index, its longest this year and driven by better-than-expected economic data.
Following the recent rally, the declines looked like a consolidation, with the markets largely in “wait and see mode” ahead of the upcoming earnings session, said NAB economist Tapas Strickland.
Second-quarter earnings season will begin in earnest from next week.
“It will be important to watch the number of U.S. deaths in coming weeks and whether greater questions will be asked about the extent of necessary restrictions,” Strickland added.
California reported more than 10,000 coronavirus cases on Tuesday, a record rise for a single day that also surpassed the number of contact tracers recently trained by the state to detect and prevent potential outbreaks.
Coronavirus cases were also on the rise in the Australian state of Victoria, which led to lockdown measures being reimposed in Melbourne, the country’s second-biggest city.
“The second wave of infection will see Victorian economic activity fall sharply and it will continue to lag the rest of Australia,” said NAB economist Kaixin Owyong.
Victoria makes up around a quarter of Australian economic activity, she said.
Citi analysts predicted global equities would hang around current levels in twelve months’ time.
“We expect bullish and bearish forces to cancel each-other out,” they said in a note. “We would not chase markets higher from current levels, but would prefer to wait for the next dip.”
Citi has “overweight” positions on U.S. and Emerging Markets equities.
Most major currencies were trapped in a range.
The U.S. dollar was 0.15% higher on the Japanese yen at 107.65.
The risk sensitive Australian and New Zealand dollars were a shade weaker at $0.6940 and $0.6544, respectively.
The euro was barely changed at $1.1273.
In commodities, gold hovered near a recent 8-1/2 year peak as investors preferred safe-haven assets. was last a shade weaker after two straight days of gains at 1,792.5 per ounce.
futures fell 8 cents, or 0.2%, to $43 a barrel. U.S. West Texas Intermediate (WTI) crude futures slipped 6 cents, or 0.15%, to $40.56 a barrel.
The number of U.S. cases of the coronavirus illness COVID-19 climbed above 2.9 million on Tuesday, data aggregated by Johns Hopkins University showed, as Dr. Anthony Fauci warned Americans the country is “still knee-deep in the first wave,” and reiterated his message to young people that they are not invulnerable.
In an interview livestreamed on Twitter and Facebook with the head of the National Institutes of Health, Francis Collins, Fauci said that unlike Europe, U.S. communities “never came down to baseline and now are surging back up.”
His warning came after the July 4 holiday weekend featured widely shared images of young people partying and drinking without wearing face masks or attempting to socially distance, measures that health experts say are key to containing the spread.
While President Donald Trump said over the weekend that 99% of coronavirus cases are “harmless,” many states are still reporting climbing and alarming hospitalization rates. Arizona reached 89% capacity for intensive care unit beds on Monday, and other states, including Texas and California were expressing concerns about their hospitals rapidly filling.
“We are still tracking the spike in the number of cases involving 18- to 34-year-olds that began in mid-June, which the County’s medical experts say was caused by a number of factors, including young people going to congested places — indoors and outside — without taking precautions such as wearing masks and practicing social distancing,” Gimenez said in the order.
Doctors said graduation parties, gatherings at restaurants that turned into packed parties in violation of the rules, and street protests where people could not maintain social distancing and where not everyone was wearing facial coverings were behind the spike, he said.
Fauci said a much hoped for vaccine for COVID-19 may not be the home run people are expecting.
It’s not going to be like a measles vaccine,” he said in the interview. “So there’s going to be follow-up in those cases to see if we might need a boost. We might need a boost to continue the protection, but right now we do not know how long it lasts.”
Vaccinations for measles, mumps, rubella, chickenpox, human papillomavirus and even influenza all require boosters to remain effective.
The virus has killed 130,312 Americans, the highest death toll in the world.
A New York Times tracker shows that 40 states and territories have recorded increasing cases over the last 14 days, while just two, Washington, D.C., and New Hampshire, are reporting a decline in new cases and 12 are unchanged. And while the number of deaths is stable, that number is expected to rise in the coming weeks given deaths lag the infection rate and there will likely be a cluster of fresh cases within five days of the holiday weekend.
There are now 11.65 million confirmed cases of COVID-19 world-wide, according to the Johns Hopkins data, and at least 539,058 people have died. At least 6.3 million people have recovered.
Brazil has the second highest case tally at 1.6 million and the second highest death toll at 65,487.
The right-wing populist has repeatedly played down the seriousness of the disease, has refused to wear a mask in public and attended several events, including a July 4 lunch with the U.S. ambassador at which he was photographed unmasked and posing close to a group of eight men.
India has the next highest case toll at 719,664, followed by Russia with 693,214, Peru with 305,703 and Chile with 298,557.
The U.K. has 287,291 cases and 44,321 deaths, the highest in Europe and third highest in the world.
China, where the first cases were reported late last year, has 84,889 cases and 4,641 deaths.
In Australia, the city of Melbourne has reimposed a strict stay-at-home order for six weeks, after reporting 191 new cases in a single day, the Guardian reported.
Novavax Inc. US:NVAX
has received $1.6 billion in funding from the federal government’s accelerated COVID-19 vaccine development program dubbed “Operation Warp Speed.” The Gathersburg, Md.-based biotech said the funds will be used to complete late-stage clinical development of its vaccine candidate called NVX-CoV2373, including a Phase 3 trial, and to scale up manufacturing.
The company is aiming to deliver 100 million doses of the vaccine, as early as late 2020. The trial will comprise up to 30,000 subjects and will start in the fall.
A Phase 1/2 trial in 130 healthy participants was launched in Australia in May with initial immunogenicity and safety results are expected to be available at the end of July. A Phase 2 trial is expected to start after that.
The Phase 1/2 trial is being supported by up to $388 million in funding from international entity the Coalition for Epidemic Preparedness Innovations, or CEPI, an Oslo-based group. Novavax shares soared 38% premarket on the news. The news sent shares of Novavax up 25%.
Regeneron Pharmaceuticals Inc. US:REGN
it received $450 million from the federal government to manufacture and supply its still investigational COVID-19 treatment, as MarketWatch’s Jaimy Lee reported. The agreement is with the Biomedical Advanced Research and Development Authority and the Department of Defense.
The company said that if the Food and Drug Administration grants the experimental therapy an emergency use authorization or an approval, “the government has committed to making doses from these lots available to the American people at no cost and would be responsible for their distribution.”
There was a setback for Becton Dickinson & Co. US:BDX
when the FDA issued an alert about an increased risk of false-positive results for one of the company’s COVID-19 diagnostic tests. In one study, 3% of the results were false positive for the BD Max System test, which received an emergency use authorization from the regulator in April.
“Consider any positive result presumptive from tests using the BD SARS-CoV-2 Reagents for the BD Max System,” the FDA said. “Consider confirming with an alternate authorized test.”
A spokesperson confirmed that BD had received reports of the false-positive results, saying that “the elevated rates represent a small subset of the positive results” and that the company is in discussions with the FDA about the issue. The news comes a day after Becton Dickinson said it would launch a test that can detect the virus within 15 minutes.
Finally, Corvus Pharmaceuticals Inc. US:CRVS
soared 137%, after the company said it has launched an open-label Phase 1 clinical trial testing an experimental monoclonal antibody as a treatment for COVID-19.
The U.S.-based study plans to enroll up to 30 participants with mild to moderate symptoms. The company is also testing this investigational therapy in cancer patients.
“Our B cell activating monoclonal antibody may be a potential immunotherapy for COVID-19 based on its ability to stimulate the production of anti-SARS-CoV-2 antibodies,” CEO Richard Miller said in a news release. The company expects to release data from the study sometime this year.
What are companies saying?
Shake Shack Inc. US:SHAK
warned that its second-quarter sales would miss estimates, hurt by restaurant closures and reduced hours due to the virus, protests and curfews. Dales totaled $91.8 million for the quarter ending June 24, below the FactSet consensus for $101.0 million.
The burger chain said same-restaurant sales sank 49%, compared with a FactSet consensus for a 43.6% decline. Shake Shack is scheduled to announced second-quarter earnings on August 11. Same-restaurant sales are “acutely impacted” by a slow recovery in New York City, one of the company’s most important regions and the early epicenter of the outbreak in the U.S.
New York City accounted for 20% of the company’s sales in the first quarter before the pandemic.
Elsewhere, companies continued to raise capital and to cut costs to combat the impact of falling sales and lost business.
Here’s the latest news about companies and COVID-19:
• With demand for bicycles soaring due to the coronavirus, Dick’s Sporting Goods Inc. US:DKS
is Bank of America’s “solitary leisure” pick. With consumers shifting their dollars from entertainment like movies and amusement parks, analysts note a 103% year-over-year spike in dollars spent on bicycles in May, based on debit card activity. Despite states beginning to reopen, June sales remain up 68% compared with last year. Bank of America also notes a rise in downloads for the Strava app, which offers GPS tracing to cyclists and runners. Dick’s offers a variety of bike brands and a large percentage of its bikes are priced less than $500.
• Mesa Air Group Inc.’s US:MESA
block hours, a measure of aircraft utilization, fell 75.8% in June because of reduced schedules during the pandemic. Block hours are counted from the moment an aircraft door closes at departure until the moment the aircraft door opens at the arrival gate on landing. The Phoenix, Az.-based regional airline has partnerships with American Airlines Group Inc. US:AAL
and United Airlines Holdings Inc. US:UAL.
It said block hours for American Airlines fell 81.9% in June, while hours for United fell 71.2%. Departures for both airlines were down 75.8%.
• Nielsen Holdings PLC US:NLSN
is accelerating a previously announced transformation plan and will exit smaller, underperforming markets and noncore businesses in the second half. The market research and audience measurement company expects to substantially complete the program in 2020 and to generate about $250 million in pretax annual run-rate savings. New York-based Nielsen will cut 3,500 jobs world-wide and expects to book pretax restructuring charges of $150 million to $170 million, up from a prior range of $120 million to $140 million. “As discussed on our earnings call in April, we have increased our focus on platform consolidations, further automation, optimizing our global footprint, and ensuring that our resource allocation aligns with high-margin essential services,” Chief Executive David Kenny said in a statement. “Today’s plan encompasses, accelerates, and expands on those initiatives.” The exits are expected to shave no more than 100 basis points off 2020 revenue growth. The company expects to book $40 million to $50 million of noncash, pretax impairment charges in the second quarter. The company will release second-quarter earnings on Aug. 5.
• Paychex Inc. US:PAYX
estimates for its fiscal fourth quarter, despite the pressure of the pandemic. “In this changing work environment, our human capital management solutions and mobility applications have enabled our clients to function and maintain their businesses while working remotely,” Chief Executive Martin Mucci said in a statement. The company ended the quarter with $1.0 billion in cash and $801.9 million in debt. “We currently anticipate that cash, restricted cash, and total corporate investments as of May 31, 2020, along with projected operating cash flows and available short-term financing, will support our business operations, capital purchases, share repurchases, and dividend payments for the foreseeable future,” said the statement. The company is now expecting fiscal 2021 revenue to fall 2% to 5% and for adjusted EPS to fall 6% to 10%.
• Tripadvisor Inc. US:TRIP
is planning to offer $500 million of new senior notes that mature in 2025, joining the many companies raising capital during the pandemic. Proceeds will be used for general corporate purposes.
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