Why one mortgage company is already preparing for a second wave of COVID-19 defaults

Quote by Jonathan Needell  |  Mortgage Professional America

June 10, 2020

With more than a third of U.S. states still experiencing an increase in COVID-19 infections, it’s clear that the nation’s economy is far from being out of the woods. Last week’s disputed job numbers raised spirits somewhat, but unemployment is still a ghastly 13 percent. COVID-19, as both a health and economic menace, is still wreaking havoc, particularly on the commercial real estate sector.

Many are anticipating a wave of defaults in the commercial space in the coming months, fuelled by thousands of bankruptcies and permanent business closures. Jonathan Needell, president and CIO of Kairos Investment Management Company, says a second wave of defaults is already building.

As Needell explains it, the first wave was already in motion before COVID-19 arrived. For many of the larger retail companies that have recently filed for bankruptcy – Neiman Marcus, Art Van, JCPenney, Modell’s, Pier One – the writing’s been on the wall for some time now. COVID-19 simply hastened the demise of their obsolete business models. No amount of government stimulus is going to save them.

Similarly challenged are highly leveraged businesses such as Brooks Brothers, Tuesday Morning and 24 Hour Fitness, whose futures are murky at best.

“When these tenants shutter their space or shrink and restructure,” Needell says, “they’re going to give a lot of space back in bankruptcy.”

Trying to time the two waves isn’t easy. We’re well into the first, but it keeps being extended: A wave of protests over the last two weeks saw social distancing guidelines thrown out the window; COVID-19-realted infection and hospitalization rates are rising; health experts have said the coronavirus may remain a disruptor until a vaccine is developed. Needell says last week’s employment figures should also be interpreted as being native to the first wave rather than signalling the beginning of the recovery.

“We’re still at 14 percent unemployment,” he says.

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