For Ethan Penner, CEO and co-founder of Mosaic Real Estate Investors, each investment cycle has its own tempo. That knowledge can provide comfort in times of great upheaval.
“For those of us who have been through a couple of [distressed cycles], you could figure where they are going to fall out,” Penner says. “They’re all different. But they also have a certain kind of market psychology that tends to resemble similar ones, and you could imagine how they’re going to play out.”
Even though recessions are distinct, it would have been hard to predict the situation we’re in today. “There’s never been a distress cycle caused by a virus,” Penner says. “So that makes this one unique.”
Penner doesn’t think the COVID-19 economic issues will be resolved until there is a vaccine. Until then, he sees an unprecedented period of economic instability.
Even then, many people will see their savings decimated, and their ability to spend will be reduced. “You’re not going to see people running out of their houses spending like they were in 2019,” Penner says. “It’s going to take a few years for people to regain trust in the system and their ability to earn money.”
At that time, a lot of discretionary retailers will have gone out of business. But that’s not the only sector that will feel pain.
“Hotels are going to be seriously challenged,” Penner says. “I think that nursing homes are in a tough spot for obvious reasons.”
But not every sector will suffer as much. “Multifamily seems to be holding up well on a relative value basis,” Penner says. “Aside from multifamily and maybe industrial, everything else is some degree of shaky.”
Those under the most stress are borrowers that utilized short-term financing for long-term assets. They bet on banks to re-up their loans at each maturity.
“They’re already facing a world of hurt,” Penner says. “I don’t think those lines are going to all get renewed. So that’s going to create a wave of probably distressed selling that will happen, if I had to guess, six months or a year from now.” While The Great Financial Crisis was “a serious, world-threatening moment,” problems resolved relatively quickly, according to Penner. He thinks the COVID-19 economic crisis could more closely resemble the early 90’s. “There was no government support,” he says. “So, the market was left to work its problems out.”
That created the opportunity for investors to come in and buy assets on the cheap. “The people who invested in that period, myself included, made careers out of reputations built during that time,” Penner says. “I think that careers will be made by those who can manage this period well. There will be winners, and there will be losers. Those who can manage that process well will come out of this as tomorrow’s heroes.”