Fed and Government Working Together Could be a Powerful Thing

Fed and Government Working Together Could be a Powerful Thing

“The response looks to be proportionate to the extent of the problem. We have no idea what the extent of the problem is.” – Justin Wolfers, senior fellow at the Peterson Institute, opining on the fiscal stimulus bill

Well, Justin, we’re slowly figuring out the extent of the problem. And from the early look of things, it’s not good. As I’m sure all CoStar subscribers have seen by now, the first bit of hard data on how broad shutdowns of business activity will impact the labor market was released last week. A new record for weekly initial unemployment claims was set and, at 3.3 million, it broke charting for decades of economists to come.

Good luck using that chart going forward. It made a molehill out of the mountain that was Great Recession job losses. Chart-makers will have to truncate the axis and add a little arrow pointing off the chart with a caption that reads “COVID-19 shutdown.”

As if this huge number of newly unemployed wasn’t bad enough, and it truly is, it also appears to be understating the issue. California Gov. Gavin Newsom reported 1 million new jobless claims, for example, while the Department of Labor’s report showed less than one-fifth of that. This is most likely due to the large volume of claims crashing local websites, reported on multiple local news sites. And it means that this week we will either see a large upward revision to last week’s record, or else another multimillion number of claims this coming week.

The 3.3 million newly unemployed means a 2% rise in the unemployment rate in a single week (!!!), meaning 6% unemployment is likely a floor for the March and April employment reports. A Gallup survey reiterated the severity of the crisis: 20% say that they, or someone in their household, has already been laid off.

These are the economic conditions facing Congress after the president signed its huge fiscal stimulus bill into law. The $2 trillion package more than doubles the 2009 stimulus package and covers broad segments of the economy, as outlined below. The question of whether it is enough is, at this point, unanswerable. But let’s jump in. A full outline of the bill is too much for this single note, but we’ll touch on what we find most interesting and potentially impactful, for the economy and commercial real estate.

The biggest headline-grabber is of course the $1,200 sent to all adults (with some stipulations). There are also expanded unemployment benefits, including coverage of gig-economy workers like ride-hailing drivers who recently lost the vast majority of their incomes due to social-distancing policies and shelter-in-place measures.

We’ll spend the rest of the piece looking at the impact of the bill on commercial real estate tenants around the country. As April 1 quickly approaches, everyone is wondering what will happen as tenants in every property type begin missing rent payments. How far that missed payment cascades through the property financing system, from landlord to bank to servicer to investor to repo lender, depends on when it hits a well-capitalized entity that can and is willing to absorb the payment loss.

The best way to stop that domino effect is to help the tenant make the payment.

With that in mind, the stimulus bill allots $367 billion in small business loans, which would be forgiven entirely if said company maintains payroll or else rehires those fired. “Small business” is defined as less than 500 employees, but that also depends on industry.

A key provision expands the definition for those in the accommodation and food services industries, obviously some of the hardest hit. In this case, the 500-employee limit only applies to an individual location, not the whole company. For example, Subway has 25,000 locations in the US. As a company, Subway clearly employs more than 500 people, but each individual store does not. If each individual Subway location took out the max $10 million in loans provided by the bill, that would exhaust 68% of the $367 billion provision. Were Starbucks and McDonalds and Dunkin to do the same, the “small business” stimulus would be used up. The concern is obviously that this provision will allow large chain companies to crowd out the mom-and-pop restaurants that arguably need the funding more.

This is clearly not what Congress had in mind.

And we’re not exactly sure what the net effect on retail landlords with food and beverage exposure might be, other than it might pick winners and losers (but that’s always the case).

We think the bigger game-changer in the package is yet to be announced. The bill provides for $454 billion to be provided to the Federal Reserve as a backstop for a new Main Street Lending Program. The only detail related to the program we’ve seen is it is to be used for lending, lending guarantees or purchasing obligations to or from eligible business, states or local governments in coordination with the Treasury.

This is incredibly vague, and for good reason. The program must be designed and implemented by the Fed itself. There is no real limitation on what the Fed can do here, assuming it can get the necessary sign-off from the Treasury. And the most important thing: The Fed will use this nearly $500 billion as capital that it can leverage to provide up to 10 times that amount of actual lending and purchases. The Fed is a bank after all!

Early last week, what feels like a lifetime ago, the Fed announced new measures to support corporate credit in both primary and secondary markets. In addition to a new Term Asset-Backed Securities Loan Facility, the Fed will conduct these loans and purchases through an off-balance sheet special purpose vehicle. Similar to the program described above, this will be operated through a fund backed by $30 billion from the Treasury to be levered 10-to-1 by the Fed.

There was a time, not long ago, when the idea of a central bank holding hands and cooperating with a government body would have been unheard of. However, during a crisis of this magnitude, nobody is clutching at their pearls. As former PIMCO chief economist Paul McCulley wrote in a prescient 2013 paper with Zoltan Poszar, “Fiscal-monetary cooperation under such macro constellations [of secular private sector deleveraging] can help solve the problem that each authority faces on its own.”

Colorful language from McCulley. In simpler terms, when the Fed and the federal government cooperate to solve a problem, that can be especially powerful.

And so we see the Fed moving on from being “lender of last resort” to “commercial banker of last resort.” These provisions are likely to be some of more powerful tools in the stimulus bill.

The Week Ahead

Next week, we expect a continuation of the flurry of Fed stimulus updates. According to the Dallas Fed President Robert Kaplan, the Fed is “working furiously” to have the details of the new Main Street Lending Program in place soon.

We also get the most relevant monthly data to measure the ongoing effects of the coronavirus: Friday’s non-farm payrolls report will be one of the most watched releases of economic data ever. The estimates for March payrolls are exceptionally wide because the survey timing is especially relevant in this case. The jobs report survey was conducted the second week of March as municipalities were just beginning to shut down, so the actual number could be fairly muted. We won’t know until we know.

We also expect another multi-million initial jobless claims print on Thursday, even after the more than 3 million claims posted this past week. The Institute for Supply Management Manufacturing and Non-Manufacturing reports, out Wednesday and Friday, respectively, should provide another look into business sentiment. Last week the IHS Market Purchasing Managers’ Index reports showed the biggest drop in sentiment since 2009, with the service sector most profoundly impacted.