Roy: Good afternoon. Roy Oppenheim here, Zoom at Noon. I say it every week, but this is the 24th week that we are streaming live from Weston, Florida, as we take us all through this pandemic and its impact on our lives, our individual lives and our offices, our businesses, and our family. Last week, we discussed how bankruptcy is playing a role in real estate, and its role for people who are behind on their rent if they’re shopkeepers or if they’re gyms or if they have other kinds of facilities, and this week we’re talking about the impact of the K-shaped economy on real estate.
And the first question of course we’re all gonna have is what the K-shaped economy really is, which we’re gonna talk about, but first, as usual, I want to thank my staff. I wanna thank Ellen, my wife, and my partner, and Jeff Sherman, who’s directing today, and Lance Oppenheim, my son, who helped put the presentation together, as well as the rest of my organization, Mia Singh, senior associate, Paola, who’s of counsel, Paola Vergara, and Wayne Patton, who does our trust and estates, who is also of counsel. And equally important, I’d like to thank Ken Morris, who’s with us today. He’s been a guest on this show numerous times on this podcast, and he’s always a delight to have because he’s very, very engaging and can tell us what’s going on in the real estate market and business from the ground, because, like us, he’s right there in the trenches.
Let’s go to the next page if we can. Let’s do the weekly economic update. So, the economic recovery. What recovery? Who is it benefiting? Who is it not benefiting? You know, it kind of reminds me, maybe many of you have read Dickens’ “A Tale of Two Cities.” It’s the best of times. It’s the worst of times. It’s a time of light. It’s a time of darkness. And so, we’re seeing these same very themes that actually were the foundational inspiration for the revolutionary war, way back in 1776, but importantly, we’re seeing two real components of the K. We see the upside, the stock market, the S&P. Billionaires becoming not trillionaires yet, but close to it. We’re seeing the CARES Act, including all kinds of handouts, not just to individuals but also to multi-millionaires. We’re seeing the S&P breaking a new record, and at the same time, on the bottom side, we’re seeing the greatest unemployment literally in our lifetime, since the Great Depression.
We’re seeing unemployment rates at over 10.2% nationally, and that’s just of those people they’re counting. We have in Florida, you know, an 11% unemployment. We have 43 million people who are literally at the risk of being evicted once these moratoriums are lifted. We have people who are food insecure. You know, one of the largest percentages in the history of any of our lifetimes. We have food banks where lines go on for miles with people in cars. We have hundreds of thousands of small business, particularly minority small businesses, unlike large businesses that are thriving, that are gonna close. This has become an existential event for so many folks in the tourism business, you know, folks associated with cruising and the airline industry and hotels and travel agents, and of course restaurants, who haven’t been able to figure out how to serve food outdoors or to get delivery done properly. Those places, you know, all are going to have a huge problem.
And so you have this K-shaped economy. People who can work from home, and those people who are assisting those people who are working from home by making the deliveries, the Amazon deliverers, the folks who are delivering food and other stuff. And so, it’s really like the best and worst of times. It is effectively a tale of two cities.
As the K shape widens, we’re seeing that many people with financial assets and white collar jobs are benefiting from the economic downturn. They’re seeing their 401K plans are actually now growing, while the rest of the country is barely staying afloat. Wealthy and middle-class asset holders have retained and resumed their wealth and their jobs and the value of their assets and their stock portfolios, yet the divergent realities are guiding policymakers, as Congress is trying to figure out what the next stimulus is going to be. Without another stimulus, I’m not sure how people are going to be able to continue to pay their rent, and how we’re gonna be able to maintain what has become a very fragile social fabric in this nation.
The Finance 202, economists talking about this K-shaped recovery as stock surge but inequality widens. We’re seeing that folks that are making the highest dollar per value, per hour of $32, if we look at the top line, their jobs actually are increasing. And that’s probably a lot of folks in the tech world, and then folks that were making under $14 an hour saw the largest precipitous drop in salaries and in jobs, and while that has come back, it has not come back yet, and it’s still 16% to 20% below where it was just in January of this year.
This is just an example of what’s going on in the real estate world, and let’s get Ken on. And by the way, this is supposed to be interactive. I expect you folks to have some comments, some questions. It’s hard for me, you know, for 24 weeks in a row just to stand here and talk, and so it’s very important that if you have questions and comments, or you wanna challenge something that we’re saying, you know, we invite you to do so. I also wanna mention that, you know, this is being sponsored both by my law firm and our title company, Weston Title and Escrow, and again, to some extent, early on, there was a tale of two cities there, too, where the title company was thriving, and people were buying and selling homes and refinancing, yet the law firm, things had slowed down because the courts were effectively shut down. That is starting to change now, but it is interesting that there is this divergence of hot and cold, success and not success, going on all over the economy. Ken, are we there? Do we got Ken on? Hey, Ken.
Ken: Hey, how are you?
Roy: Very well. Ken Morris, good friend. Been in the real estate business for 30 years. Morris Southeastern has done so well in this market, and is very nimble, and comes from a great family of very successful folks in the real estate industry. Ken, it’s good to have you back.
Ken: Nice to be here. Thank you very much.
Roy: So, let’s go back to this first picture. So what’s your first thought when you see this?
Ken: Well this is really what’s going on. I mean, most of the tenants in Manhattan, 95% of the office workers, have not gone back to their office buildings. And the longer this continues, the longer it will continue. Down here in south Florida I’m seeing the same thing. Empty office buildings, empty office parks. You know, this is going to continue for some time until there is some type of comfort level from a vaccine or something, that people are not gonna be so afraid to go back to the office. But this is indicative of what’s going on, and technology, I mean, we’re doing this by Zoom. Zoom works. Microsoft Teams works. There’s a few other platforms that work. It doesn’t mean people are excited to go in from Zoom call to Zoom call, but the technology works, and business is still being conducted. And, really, most workers that are knowledge workers have been untethered or detethered from the work space.
Roy: And let me just…there’s a questions which segues perfectly into what you said. Someone’s saying, “So, what does it really mean, a K-shaped economy?” Let me give it a first shot, and then you can say. But I mean, the K-shaped is that the successful person who is in technology, who’s working for Zoom, can use Zoom, can use Microsoft platforms and doesn’t miss a beat, you know, with who they’re working for, their company, and then you have, again, the folks who are in the tourism business. You could be a pilot. You could work for ship. You could be in entertainment. You could work for a night club. You could be a bartender. You’re at the bottom of the K, while the other folks are at the top of the K, and then the folks who own 401Ks are at the top of the K, and the folks who can’t pay their rent because they don’t have a salary are at the bottom of the K. And so you have this divergence, you know, of folks. And again, it’s hot and cold, success, not success, and to some extent, it’s becoming a winner-take-all because of network effect that’s going on through the use of technology. What’s your thought?
Ken: Yeah, I mean, in my world, I look at, through the lens of commercial real estate and what properties are doing well and what aren’t. You know, regional malls, not so good, probably not gonna ever be good. Neighborhood retail centers, unless they’re surrounded by strong demographics, they too are not gonna do very well. Small businesses are under tremendous strain. Many of them are going out of business. We’ll probably lose 50% to 60% of the restaurants, you know, throughout North America. That doesn’t mean they’re never gonna come back, but it’s gonna be a whole host of people going into the unemployment line. I see a big tidal wave of unemployment coming later on this year and into 2021. And even when you look at a tale of two office buildings, one could be, you know, in the suburbs, surrounded by, you know, high-end bedroom communities that will do very well because the executives don’t wanna drive very far to get to their office, and then you could have one that is in maybe not the greatest part of town, that will never get reoccupied, ever, because there’s not enough demand pattern for it. It will have to meet the wrecking ball or be repurposed into something else.
Roy: So, I wanna just…hold that thought. I wanna take a look at this S&P 500 image, and then there’s a question that links right into it. We can go back to the other question. So we’re seeing here that folks who are investing in the stock market have a very bright idea of what the future is gonna be. They’re anticipating that there’s gonna be a vaccine. They’re anticipating that they’ll be person to person contact, that people will be going back to venues, they’ll be going back to stadiums, they’ll be going back to restaurants. This is suggesting that they’re expecting a roaring ’20s, is what we’re suggesting, but the dark side is that we have to A, get there, and B, we have to believe that all our problems will be solved by a series of vaccines.
And I know that there are, you know, some real interesting positive aspects, and billions of vaccines are being made right now, some are in phase three. We know that convalescence plasma has worked for 100 years, and now the government is recognizing that. In fact, if anyone has had COVID, we know people who have, we encourage you to donate blood, and to donate your plasma. We’ve been encouraging people to do that. We have friends and family who’ve done that already. Not family, but certainly friends. And it’s important that you do that, because you’re actually gonna be helping your friends. But at the same time, you hear in Hong Kong that someone actually got COVID again, and that’s now supposedly been proven, and so, the question is how long your antibodies are gonna stay up.
But at the same time, someone is suggesting, you know, that for restaurants, for example, is there’s…Jerry Kapinski, a good friend, and Jerry’s suggesting that nothing’s gonna ever take the place of face-to-face time with someone that builds trust, you know, for a relationship, whether it’s for business or friendship or family, but at the same time, these restaurants need to be able to bide the time that they need so that they can, again, plan on face-to-face time. And until you get to that point, you know, we are where we are. And so it’s kind of interesting that people are very, very optimistic. I don’t know if they’re irrationally optimistic, or if in fact they have an idea that things are gonna just get great and be better than they ever were.
And so, I think time will tell. I don’t think we have an answer for that. There’s another question. How specifically will the price of light industrial and small warehouse space in south Florida fare through the next year and beyond? I’ll let you handle that one, Ken.
Ken: You know, I think that overall, that small-bay flex product will probably do pretty well. But keep in mind that most of the tenants in that product type are small business, which are under, you know, pressure. There can only be so many, you know, pool cleaning companies that are gonna make it, and electricians that are gonna make it, and plumbers, and so forth. That’s who those small-bay flex product, you know, serves that population. With that said, there’s really no land left to build that kind of product, and the cost of construction is so high that you really can’t duplicate it. You can’t demo something else and rebuild a small-bay flex or small warehouse product, because the numbers just will not pencil out, period, end of story.
Roy: Thank you. But this is a good segue to the next slide, but we could use malls to actually serve that uncatered need, and I wanna talk [crosstalk 00:13:02]
Ken: Yeah. I would say maybe. But, you know, back in the early aughts, I was interviewed by the people that had bought the fashion mall, and they wanted to convert part of the fashion mall or all of it, the fashion mall, to office space. And one of the things that I sat down with them and said, “I don’t think it’s gonna work.” And ultimately it didn’t work. It never got any traction. But I said, “Just the distance between where you park and where you get to your office was a 10-minute walk.” I said, “Most people in this market are not gonna be willing to do that, not to mention all the other improvements that are gonna be necessary, and enclosed malls are basically little ecosystems, and you’re not gonna be able to repurpose them unless you spend a tremendous amount of capital expenditure money to repurpose them to something else.” Even if you turn them into bulk distribution, and you and I talked briefly this morning about the concept of turning them into, like, I’m a nut, so, imagine we turned the Broward Mall into, like, a big gross facility for fish farming, for hydroponics, for cannabis cultivation. I mean, in essence, one of these big regional malls could feed the area that it sits within, and have produce being sold and so forth. There’s a lot of adaptive reuse that can be done. Most of it’s not gonna happen. Mostly, the wrecking ball’s gonna come in and knock a lot of them down, I predict.
Roy: So today on the front page of “The New York Times” they talked about Carl Icahn, and how he went short on a mall ETF, and they went short, which means they were betting against the malls, and made, like, over a billion dollars while the malls are dying and going into bankruptcy and wrecking balls are coming through, and they made a fortune because they bet against the malls, just like certain people bet against the mortgage market in the last economic crisis. They went short. Remember there was a book and a movie called “The Big Short.”
Ken: Big Short, yeah.
Roy: This is The Big Short 2.0, but instead of it being mortgages, although that may still come by the way. That could be Big Short 3.0, or 2.2, or 2.1, but in this particular case, you know, people have made fortunes on betting against certain sectors. And so, here, again, we have the malls doing poorly, but we have Wall Street doing phenomenally well by betting and hoping for malls to do poorly, and it’s just the nature of how our economy is structured, and some people think it’s fair and others think it isn’t, but it is what it is. And so, the real question’s gonna be what do we do with these malls? Amazon said they’re gonna take over a whole bunch of malls. Some of the mall owners, Simon, said that they’re gonna invest in the retailers inside the malls and actually take over the brands, and they’ve created a brand division. Not sure how that’s gonna work, but, you know, they’re gonna be different plays on what this space is gonna be reused for. Some of it will [inaudible 00:15:48]
Ken: I don’t think it’s gonna be so easy to turn a lot of those regional malls into distribution centers, because distribution centers require a specific clear height for them to be efficient. You know, Amazon goes up very high cubic. Most of my distribution center clients that I’m representing locally and around the country look for a minimum of 32 foot clear. A lot of these older mall buildings are not 32 foot clear, so then they’re gonna have to go out and that’s why they’re gonna have more space laterally. But, you know, ultimately, it’ll have to be at a lower cost basis to make it make sense to use those older, lower ceiling or roof properties.
Roy: But the ones with the high ceilings could actually become good production studios also. You know, and you could create regional film businesses if need be because of the high ceilings, so that…
Roy: Hydroponics. I mean, so there’s lots of ways for these buildings to recast themselves if we get creative, and of course, the Amazon use is the most interesting. This slide, this next slide is kind of interesting. It shows how the performance of stocks have not been uniform since January, and it’s kind of interesting because, you know, everyone’s saying the stock market’s at an all-time high. The reality is is that 62%, the light blue, are companies that have done poorly and have lost money compared to January, and the dark blue are your Amazons, your Googles, your Facebooks of the world that have done, and the Netflixes and Nvidias, that have done phenomenally well because of this massive transition that’s going on in this economy, this technological revolution.
And what’s happening is this technological revolution already existed before COVID, but COVID literally has probably exacerbated that revolution and pushed it probably two, three, four, five years ahead of where things are. So we’re seeing this truncation of certain companies that are just running away, and then they’re bringing all the indexes up with them, but when you pull back the curtain, you’re seeing, if we go to the next slide, that it’s a perfect K. We’re seeing right here…if Jeff can take the cursor…if we have this being the axis, and then here, the dark blue is the companies that are doing particularly well, and these are down, you have an absolute perfect K there. And so there again, you have a tale of two cities, a winner-loser, K economy, not just in terms of employment, not just in terms of people who are being successful and not successful, but you have it in terms of companies that are doing well and companies that are not doing well, and it’s all part of this winner-loser take all thesis that we’re talking about here.
Let’s talk a little bit about the pandemic, and then we’ll go back to real estate a little bit. In China, where the pandemic began, life is starting to look normal, and I think maybe that’s affecting everyone’s optimism. This was just a rock concert, some sort of concert that just occurred, and you’re seeing million, you know, not millions, but thousands and thousands of people packed in together, and we’re gonna see what happens in the next two weeks. It’s gonna be very interesting. And then again we talked about the first documented reinfection reported in Hong Kong. That’s not great news. But in general, if we take a look here at this red line, we’re seeing that the number of cases in the United States is really starting to drop, and if we see these grey areas, we’re seeing what the peaks were, and now we’re seeing how the averages are here in the U.S.
And so, we’re seeing that things are starting to get a little bit better. Hospitals are not as crazy, and, you know, in fact, in Broward County, they’re talking about going to the next phase of allowing certain businesses to get back to doing their thing. Again, this is Florida. New reported cases are down, and we’re seeing certain hot spots in certain parts, but we’re seeing, if we go to the end right here, we’re seeing that there’s a precipitous drop in the number of cases that are going down…and we kind of anticipated that because the number of cases had been dropping, so now we’re seeing the number of deaths dropping off very substantially.
Impact of the K-shaped recovery, let’s keep going, as it relates to real estate. Again, Ken, we talked about the office front. So let’s talk about the suburban office market. You think, Ken, that that’s not gonna be hit the same like big city markets, correct?
Ken: Well, I think that, you know, again, we’re very early in the ball game, folks. You know, anything I can tell you is just based on what I’m hearing talking with a lot of different occupiers and a lot of my colleagues around the country. What is predicted right now is the office is not gonna disappear 100%, but I personally predict that the overall footprint will shrink. Most of my clients are shrinking their footprints, and what’s gonna happen is most enterprises, whether they be Fortune 100 or entrepreneurial small shops, are going to rotate, have a hybrid model, where employees rotate in and rotate out, and knowledge workers and people that do not have to even be in a physical place may choose to live in a much less expensive environment, still do great work, and still get paid very well, and actually have a better standard of living than having to live, you know, in Manhattan or live in Silicon Valley. So, most of the large enterprise big companies that are multi-market occupiers are basically looking to reduce their footprints and then push out into the suburbs, where they’ll have sort of hub-and-spoke model of occupancy, and instead of having 200,000 square feet in downtown, they’ll have 5000 square feet in a suburb, and then 5000 feet a hundred miles away in another suburb, and that will be the new model.
Roy: And they call that a hybrid type of model because some people will work from home. Sometimes they’ll come in. They’ll come in [inaudible 00:21:22].
Ken: That’s right.
Roy: But that impact of that’s very interesting, and we’re seeing that in New York and in other major cities, is that allows people to live further and further outside the city. So, I had some friends who lived hundreds of miles from New York City for the past three years, right? Or even four years. One lived at the East point of…in Montauk. I had someone else living in Massachusetts, someone else living in the Berkshires, and they had jobs in the city of New York, and they had literally, would come in, like, once a week, for the past three or four years. They now look at themselves as the trailblazers for what everyone else is doing.
And so, I don’t think when this is over, everyone comes back to live in downtown Brickell on, you know, in downtown Manhattan. I think this idea that we can expand out further is gonna have tremendous impact on communities north of Palm Beach, maybe on the West Coast going, you know, up to that area between Orlando and Palm Beach that still isn’t that pricey, and you’re gonna have people who are gonna be able to socially distance, have larger spreads, maybe they have to come to Miami once a week, and they will, and they’ll drive the two, three hours that they have to, but for the most part, that’s where they’re gonna work, and if they do, maybe they’ll have a flex office, you know, in Palm Beach or something, as opposed to necessarily, you know, coming all the way down. Same thing we have now with the legal community. You know, in the past we’d have to go to a courthouse for a hearing, but, you know, now you don’t have to do that, and so you can take cases really anywhere in the state. But Ken, what’s your thought on just, you know, the suburban market, both residential and [inaudible 00:22:51]?
Ken: Again, you know, like, with the have and have-not, K-shaped, you know, some office buildings that have the right parking ratio, that are generally modern, have bandwidth… Bandwidth is really important. And that goes, you know, to the haves and have-nots in society right now. You know, lots of kids going to school are doing just fine because they live in houses with bandwidth and neighborhoods that have bandwidth. And lots of kids don’t have access to that bandwidth, and that’s a problem in this country, from a societal level, the same thing as with real estate. Some buildings are modernized. They have the right air conditioning, the air conditioning systems can be modernized to be post-COVID, you know, ready. That is something that’s an ongoing debate right now about how much is necessary. I’m having, I’m actually in the thick of that right now on a building that I just took over management, whether we’re gonna add UVC lighting to it and other filtration methods. So it really depends on the type of building, where it’s located. I think access to freeways and access to neighborhood restaurants and retail certainly will all help. If it’s, you know, some building that’s in the middle of nowhere, it’s not gonna do too well, even if it is “in a suburb.”
Roy: You know, we did a UV lighting two week ago on, you know, on this webinar, and it’s taking off, both in terms of buildings, in terms of hotels. Everyone’s into this UV lighting now to try and see if they can destroy the germ on contact. I wanna go to what Amazon’s doing, because this is kind of interesting. These are the cities that Amazon is expanding into, the top 20 markets. And it’s kind of interesting because it isn’t just your large cities that you would expect, like San Francisco, New York, but you have secondary cities like Raleigh and Minneapolis and Phoenix and Detroit, and the reasons they’re going into those cities is because they have found that there’s top tech talent in these cities, and so that’s gonna become a determination of the real estate market, because where Amazon goes, you know that the residential market is gonna be stable, and you certainly know that the office market’s not gonna be too bad, because you’ll have other companies serving those areas. What’s your thought on that?
Ken: No, I agree. I think where Amazon goes, you know, good things follow, but, you know, Amazon is a very highly priced stock. I think Amazon’s taken up so much oxygen in the room of e-commerce. You know, I’m a little nervous about having all of the, you know, the e-commerce eggs in the Amazon basket and how much control that they have. Sooner or later, people are gonna wake up and say, “Wait a minute. These guys are pushing a lot of different levers across, you know, the economy and across, you know, societal boundaries.” So, I think it’ll be interesting to see what happens. And then, also what happens with jobs.
There was a question about what effect AI is gonna have on unemployment moving forward, and I don’t think we’re gonna ever have, like, a Skynet, you know, a terminator-type AI system that’s gonna destroy us, but I think AI is taking away a lot of jobs in the legal profession. You know, AI programs to read documents. In journalism, it creates, you know, small articles. Things are changing as a result. You know, also bringing back manufacturing for China sounds great, but a lot of that manufacturing that’s gonna come back is gonna be done by industrial robots and 3D printers. So I think we have to be honest about what employment’s gonna look like, and the utilization of space moving forward.
Roy: And, you know, there are a lot of economic, political theories on how to deal with that, and that’s not what we’re gonna talk about today, but people are still talking about a universal wage, the $600 a month for a period of a week for, you know, that we had was the first stab at that, and, you know, with robots, one day, there may have to be some discussion of taxing robots, or figuring out how to keep people going. You know, on this picture right here, and I wanna move on, this is actually 5th Avenue. I recognize the building. My dad used to work in the building on the right. That was 666 5th Avenue. It’s actually right across from Trump Plaza, and you can see there’s almost no one on the street right by the Nike building, and it’s really kind of an interesting, unfortunate sight.
Let’s talk about listings. And I want you to take a look at this if you can, Ken. We’re seeing that listings are not as high for apartments and residential rentals as they are for real estate listings. And so, the red, excuse me, the blue is the real estate listings. We’re seeing listings are now coming back, and people are feeling that this is a seller’s market, and so they’re trying to benefit. Before that, listings had dropped precipitously, and so now we’re seeing listings coming up, but, you know, as we see from the title company, the velocity and speed by which, you know, people want to sell or refinance, that, you know, it’s a very busy time for many realtors right now. And if it’s not yet for you, it will be shortly, so just…you have to hang in there. One of the questions, what do you think about the small, the strip plaza sector? What do you think is gonna happen to the strip sector? I mean there is a place…
Ken: If they’re well-located…I saw the question. If they’re well-located strip malls that are surrounded, or located near, you know, a residential community that will support the small businesses, you know, the pizza place, the nail salon, you know, the barbershop. As long as, you know, the demographic infrastructure’s there to support that strip center, it’ll be just fine, but there’s literally hundreds of millions of square feet of strip centers that were built, you know, in the ’80s and late ’70s for all the wrong reasons, for tax, you know, avoidance reasons, that are just not located in the right place, and don’t have the demographic support to make them, you know, to make them do well. So, again, it’s a case of haves and have-nots. The retail strip centers here in West Broward, in Sunrise, Plantation, Weston, most of them are gonna be just fine. They will see probably a 20% hit on their tenants, but that’s short term as we move through, you know, this crisis.
Roy: And we’re out of time as usual, and, you know, we could keep going for another half hour, but unfortunately, our time is up for today. I wanna thank you as always.
Ken: Thank you.
Roy: Again, I wanna thank the law firm, Oppenheim Law, where we are dealing with all these issues on a regular basis for homeowners and lenders and folks who have business and people who are buying new businesses or in disputes with their businesses. There’s just so much going on. And on the title company, people are buying, selling, refinancing, investing, and of course, the law firm is starting to see unfortunately more activity in the area of foreclosures. We anticipate that that’s gonna become a major problem, as, again, 30% of the population right now is already 90 days behind on their rent or mortgages. And so, depending on what this next bailout looks like, we could see something that pales compared to what we went through just 10 or 11 years ago. So Ken, thank you so much. I appreciate it. I wanna thank everyone again for participating and being interactive. Again, on behalf of the law firm and the title company, Roy Oppenheim Zoom at Noon. This was number 24. See you for number 25 next week. Thank you and have a great day, and a great week.
Ken: Thank you. Take care. Be well, everybody.
Roy: Take care.