The office isn’t dead yet, even if remote work keeps rising, says Moody’s

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.

Read: Want a slice of the new Manhattan skyline? There are bonds for that

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.

Big decisions might wait


A caveat is that the chart assumes existing office leases will remain unaltered, even through more tenants are starting to battle their landlords over rent as a result of the coronavirus crisis, which first bore down on New York City in March, but now has parts of Arizona, California, Florida and Texas battling a surge in new infections.

See: Lockdowns ease in New York City and other major cities, but commercial real estate still tied in knots

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
shedding 360 points Thursday, while the tech-heavy Nasdaq Composite Index
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.”

Related: Here’s a snapshot of what Wall Street’s coronavirus protocols look like for returning to work

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‘The market isn’t pricing in an all-clear on the economy,’ say BofA analysts, who say the S&P 500 will end the year at 2900

Many analysts have spent the past few weeks advising investors to buy the dips and pointing to unprecedented levels of fiscal and monetary stimulus, among other things, as reasons to be bullish on stocks.

Not BofA head of equity research Savita Subramanian. On a mid-year outlook briefing webinar, Subramanian explained that her year-end target for the S&P 500

is 2900: an 8% decline from current levels. She offered one bull case for stocks — that they’ve rarely been so attractive, relative to bonds — but also noted a litany of headwinds.

“I wouldn’t paint myself as a bear but the risks between here and year end are completely to the downside,” Subramanian said. “We’ve had a reopening frenzy and now we’re seeing payback.”

What are the headwinds?

Millennials, who got socked with the financial crisis and Great Recession of 2008 just as they were about to start their working lives, now face another economic calamity just as they may have finally started to find some footing. That means consumer spending won’t be anything like it was in the past, Subramanian thinks. Consumers may adopt a “recession or even depression-like” spending mentality.

By nearly any metric — see the table below — stocks are extremely expensive.

Stocks are expensive, no matter how you slice it. Source: BofA

And yet, over the past two decades, margin expansion has been largely driven by globalization, falling interest rates, and tax cuts — all of which stand a big risk of reversing.

A Democratic victory in November will likely have the effect of reversing many market-friendly policies, Subramanian thinks.

She also calls herself “really worried” that a lot of growth has been pulled forward from the future, in the form of fiscal and monetary stimulus, into today’s economy to plug the hole created by COVID.

Finally, in response to the often-asked question about why markets seem to be so disconnected from the real economy, Subramanian said that she doesn’t think the stock market is pricing in that “everything is great.” Investors continue to reward stocks that will continue to benefit from coronavirus-induced lockdowns, such as technology leaders and online retailers. Her own view is that investors should overweight consumer staples, industrials, technology, and financials, in that order.

“The market isn’t pricing in an all-clear on the economy,” Subramanian said.

See:Wall Street’s road warriors have spent the past three months grounded. How’s that working out?

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The risk-reward in the stock market isn’t looking good, warns fund manager overseeing $16 billion in assets

‘The stock market has already discounted a significant degree of the economic recovery. So, incrementally improving data here might not do much to lift prices. The risk-reward isn’t great here.’

That’s Bryn Mawr Trust’s Jeffrey Mills, who oversees $16 billion in assets, talking to CNBC Friday about what’s next for a stock market struggling for direction to start the week. At last check, futures for the Dow Jones Industrial Average

had bounced off a triple-digit drop to push higher.

“The liquidity injection that the Fed is introducing to the market is actually being tapered off,” Mills went on to say. “Stocks are discounting an environment that is not necessarily reflective of not only economic fundamentals, but earnings fundamentals.”

Read:He hates shorting the market, but he’s at it again

Mills said that using trailing price-to-earnings as a measure, valuations haven’t been this high since the tech bubble. In this climate, Mills went to underweight in stocks mid-April.

“You have information that’s all over the map. Sentiment data isn’t really clear. One day you get a positive virus headline. The next day you get a negative one,” Mills said, explaining that investors need not get too bearish or too bullish. “Positioning needs to be somewhat nuanced.”

Watch the interview:

Last month, Mills spoke of the benefits of having cash on the sidelines in this climate.

“When people ask me, ‘How should I be invested? I need this money in one or even two years’ time.′ I tell them they probably shouldn’t even be in the stock market at all,” Mills told CNBC, adding that the advice applies now more than ever.

The major market indexes in the U.S. are coming off four weekly gains out of five, with the Dow Jones Industrial Average

and S&P 500

both up more than 1% last week. The tech-heavy Nasdaq Composite

added more than 3%.

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Here’s what stock-market investors think is the biggest factor in their investing as coronavirus cases rise—hint: it isn’t a second wave

Worries about rising coronavirus infections in parts of America have the stock market on edge this week.

COVID-19 cases in Arizona, Florida, the Carolinas, California and Texas, have jumped, with those states registering record-high, single-day increases on Thursday.

The re-emergence of the novel strain of coronavirus that causes COVID-19 compelled the World Health Organization at a Friday briefing to say that the pandemic has entered a “new and dangerous phase,” coming 101 days after the organization declared the virus a pandemic.

Making the point, Apple Inc.

announceed it was re-closing nearly a dozen stores as infections rose in some states.

The stock-market buckled amid the news, ending a volatile day mostly lower, but all three U.S. benchmark indexes ended higher for the week.

However, a recent survey by Jefferies Financial Group indicates that the rise in coronavirus cases is not the central worry for investors. The investment firm’s survey indicates that the shape of the economic recovery is the single-biggest factor by far for the investment community (see attached chart).

“For the last few months, markets have largely ignored economic data, blindly following the Fed. That may be changing,” analysts Aneta Markowska and Thomas Simons wrote in a Friday report.

Indeed, economists and investors have been engaged in an alphabet-centered debate over the likely shape of the recovery from the recession caused by the COVID-19 pandemic. The questions center on whether gross domestic product growth plotted on a graph would look like the letter ‘V’, that is a short, sharp recovery, as opposed to a ‘W” representing a double-dip recession, or even a ‘U’, signaling a slow recovery.

Read: ‘The dollar is going to fall very, very sharply,’ warns prominent Yale economist

That said, the strategists note that small-business activity appears to be losing momentum at a national level, citing declines in employment and the number of businesses that are open, amid the restart of activity in all 50 states.

What shape the recovery takes may be the most important question, but it may also be the most difficult to determine at this juncture, which makes the answer, perhaps, all the more significant.

Check out: Stock-market legend who called 3 financial bubbles says this one is the ‘Real McCoy,’ this is ‘crazy stuff’

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Fauci calls pandemic his ‘worst nightmare,’ warns ‘it isn’t over yet’

Dr. Anthony Fauci on Tuesday called the coronavirus pandemic his “worst nightmare,” and warned that while he’s confident a vaccine will be developed, the outbreak is far from over.

“In a period of four months, it has devastated the whole world. And it isn’t over yet.”

— Dr. Anthony Fauci

During an interview at a virtual conference held by the Biotechnology Innovation Organization, Fauci, the top U.S. infectious disease expert, said he’s been most surprised by “how rapidly it just took over the planet.” He called the current pandemic one of the worst in world history, noting that while many easily transmissible diseases take six months to a year to span the globe, COVID-19 took just a month.

Fauci said the unique respiratory illness with such transmissibility and lethality “turned out to be my worst nightmare.”

He also dismissed hopes that the pandemic will be over anytime soon. “Where is it going to end? We’re still at the beginning of it,” he said.

Still, Fauci was optimistic that multiple treatments and more than one vaccine will be developed, and praised the response from the biotechnology industry.

“The industry is not stupid. They figured it out,” he said. “There’s going to be more than one winner in the vaccine field because we’re going to need vaccines for the entire world. Billions and billions of doses. So I’m almost certain that we’re going to have multiple candidates that make it to the goal line get approved and get widely used.”

A number of vaccine candidates are already undergoing human testing, and a highly touted vaccine candidate from Moderna Inc.

will start a key phase 3 trial in July.

As of Tuesday, there have been about 7.2 million coronavirus cases worldwide, with more than 408,000 deaths, including more than 111,000 deaths in the U.S, according to date from Johns Hopkins University.

Also Tuesday, the World Health Organization backtracked on comments Monday that COVID-19 transmission by asymptomatic patients was “very rare.” Dr. Maria Van Kerkhove said Tuesday that her comments made during a previous news briefing were a “misunderstanding.”

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