This week I wanted to focus on the Houston/Texas with my news update. Here are a few quick hitting notes from articles I've read.
Harris county has implemented a Work Safe Order for the community through April 30th. Details updated regularly can be found online at: www.readyharris.org/Stay-Home. Any non-essential businesses are required to have their employees work remotely through April 30th. The list of essential businesses is fairly broad including: Infrastructure, Government Functions, Healthcare Operations, Essential Retail (grocery stores, gas stations, etc.), Childcare, Airports, Real Estate Services, etc. The full list can be found at the link above.
The Railroad Commission of Texas is considering mandating a reduction in drilling capacity in the state for the first time since the 1970s. Texas in general shies away from regulation. Ryan Sitton, the commissioner, believes that it could take up to 2 years for demand to return to pre-Covid levels. Global levels of oil production are over-supplied 18M barrels per day. As storage space runs out producers will be forced to slow production anyway. Local Houston oil and gas companies have furloughed workers and announced dramatic spending cuts. Until crude prices (currently at 31 per barrel) exceed 60 or even 80 per barrel we are going to see an impact to that sector of upstream and midstream oil production.
Over two thirds of layoffs nationally are related to the service industry including restaurants, hotels, travel companies, etc. Texas is no different. Some consultants estimate that Houston could lose 20-25% of its restaurants. For the week ended March 28th there were 275,597 new applications for unemployment and 155,000 the week before. Nationally the total requests were $6.6M. Personally, I have taken a slight 10% hit to my short term rentals on Airbnb. Recently though it has picked up as folks look to have a quiet place to work, or are wanting to be near the med center for health reasons. All of my units are located within 3-10 miles of the Texas Medical Center. My friends with units targeted towards vacation are having a tougher time see reductions as high as 80%.
Flights in and out of Houston are down roughly 70%. In some instances flights are still continuing with zero passengers. The city is working with airlines to deferring rents and other fees paid to the city. There is fear that the airline industry will be hit hardest. Many business travelers are realizing that their mandatory travel actually wasn't so mandatory. Many airline companies are focused on working with the government for deferment of payments and bail out money.
Real estate has taken a wait and see approach. The debt markets have slowed down. The underwriting requirements on C and D class property have changed considerably. I've had one refinance fall out already and was called by a mortgage broker I work with to tell me that deals that could have been closed before are no longer qualifying under new guidelines. There aren't exact changes as "every deal is different". I will say that older properties seem to be hit harder than new properties and all buyers are expected to factor in rent reduction from coronavirus in their underwriting.
Additionally, the interest rate spread between the federal rate and the market rate has increased about a half a point. Friends in my entrepreneurship group have also pointed out that the secondary market liquidity is getting tight as banks aren't honoring guarantees they had previously made. There is some opportunity to buy debt for property for 50-80 cents on the dollar. I haven't seen material movement in prices yet, but the bigger stuff is rarely fire sold. I think we'll see prices come down 1-2 months after the US workforce is allowed to return to work. Right now many sellers have simply tabled putting together a deal. Just making debt harder to come by and increasing underwriting requirements will lead to a price decrease. Sellers haven't made drastic cuts for large multifamily as of today. I do expect some older investors will decide they don't want to wait for recovery.
For me personally, my community banks have been great. I reached out to all of them and was able to negotiate either interest only payments or a deferment. I reached out early to ensure that I was first in line for the paper work to make it happen. Many landlords will be impacted. As of right now we've lost three tenants due to the virus and have many more (30% total) with outstanding balances that we are attempting to work with. Being prepared and proactive is what I can recommend right now. As property managers, for our owners we are documenting anyone impacted and requiring them to fill out the NAA (National Apartment Association) payment doc as well as provide supporting evidence of their impact.
If you'd like more details on any of these items don't hesitate to email me!