Unsanitized: The COVID-19 Report for Oct. 19, 2020
Commercial Real Estate and the American Lifestyle Shift
Plus, our special report on universal family care
An empty store in a mall being used as a voting center in Overland Park, Kansas. What will this store become in a couple weeks? (Charlie Riedel/AP Photo)
First Response
All week long, we are rolling out our special issue on family care: the crisis that exists today, and how it can be fixed. We have seen family care exacerbated in the pandemic, between child care deserts, the lack of paid family and medical leave, and nursing home facilities turned into death traps. But I started talking with advocates about a family care issue before the pandemic, because the needs were so great. The current system hurts families, who cannot access or afford care; hurts care
workers, who paradoxically make up one of the fastest-growing and lowest-paid professions in our society; hurts care providers, who are on the verge of going extinct (at least the ones that aren’t nursing homes owned by private-equity financiers which exploit workers and patients).
We can fix this for all generations across the life cycle, and we can do it through social insurance that spreads costs so they don’t hit families at their most vulnerable. We know it would work: millions of workers got a paid sick leave benefit through one of the early coronavirus response bills and it’s worked to reduce case counts by tens of thousands. But at the end of the year it’s going to go away, for no reason. We can instead identify this moment as the time we recognized that families and workers need support, to fill in this neglected part of the safety net. It’s time for universal family care.
First we have to identify the problem, which we will do today and tomorrow. The rest of the week we’ll be running stories on solutions. Here’s today’s lineup:
An introductory
piece by me, with some biographical background, on why we need universal family care.
Here at Unsanitized we’ve seen the crash in commercial real estate coming for some time, both in retail and office space. It doesn’t take every business to go under, or every office to go virtual, to create a sustained problem. Because in a connected economy, a permanent shift, even a modest one, has ripple effects.
What does it mean when offices no longer function? All of the businesses that support office workers—lunch counters, drugstores, dry cleaners near the office (dry cleaning itself is in crisis, I’d suspect, since not as many people are wearing business attire)—struggle. When anchor stores in malls go away, so does the foot traffic, hurting all the other stores in the area. The demise of hotels, made worse by the elimination of business travel (which is probably a long-term trend), makes it that much harder to sustain tourism. All of these properties pay taxes, so the local tax base erodes. To the extent that commercial property
mortgages are tied up in securities, or just because the loans default, you have this leak out to the financial sector. This is already clear in big cities like New York, where debt prices are falling. One-quarter of all hotel loans are in “special servicing” (a sign of financial stress), and nearly as many retail property loans.
Foreclosures and defaults can spread from the landlord of one property that has a mall, let’s say, to another in their portfolio that’s a block of apartments. It’s a vicious cycle downward.
To many it’s an inevitable cycle. We have been overbuilt on retail for a number of years in America, especially compared to other industrialized countries. We don’t actually need quite this much retail. If offices can function virtually—though I think there are some hardships to that—it’s more sustainable for their businesses. It’s worth being skeptical of bailing out the commercial real estate sector for a host of reasons. The market has been largely frozen in place, on the expectation that things will bounce back to normal. But what if it would be illogical and unnatural for that to
happen?
I got at this back in June with a commentary about stranded assets. Malls have lost value, office buildings have lost value, business travel has lost value, and so on. People have changed their habits during the
pandemic and may not change them back. What does that mean to an economy reliant on those old habits? Something as simple as a small shift from restaurants (which charge sales tax) to groceries for in-home meals (which don’t) can devastate municipalities if nothing is done to compensate.
As I wrote in June: “Our economy is so dependent on a particular type of consumer culture, and that will have to change. One of the reasons we won’t snap back so quickly economically is due to the wrenching steps it will take to get to that change.”
There’s kind of a “Wile E. Coyote hovering above the chasm” act going on, with property transactions nearly non-existent. That’s because making a sale would actually set a market price, and reveal the worst. It’s not sustainable to just have commercial real estate float along. If all these loans were bank-owned, well the banks are flush from trading revenue, they can afford to give breaks. It’s the investor-owned loans where you will see the stresses.
This is not a 2008-level event. The entire commercial mortgage-backed securities market is about one-tenth (maybe less, I have to go back and check the numbers) of the residential mortgage-backed securities market during the housing
bubble. But it will overlay financial stress on top of existing economic stress. And it’s about more than subprime securities trading back and forth: it’s about a permanent change to how we live, and how that disrupts the economic course.
