COVID-19: Impact on Financial Markets and Opportunity Zones, with Craig Bernstein

Craig Bernstein

How will the ongoing coronavirus pandemic affect financial markets and Opportunity Zones?

Craig Bernstein is principal of OPZ Capital, which launched the OPZ Capital Opportunity Zone Fund in 2018. Craig has over 20 years of real estate experience, and is a prominent thought leader in the Opportunity Zones industry.

Click the play button below to listen to my conversation with Craig.

Episode Highlights

  • How the unfolding coronavirus financial crisis is affecting loan terms, lines of credit, and tenant issues.
  • How hotel shutdowns are affecting hospitality real estate, and how it may eventually present an opportunity for this asset class.
  • The problem with cheap capital and how it’s currently hitting home with some investors.
  • Why Craig is bullish on the long-term future of the markets.
  • Why multifamily may prove to be one of the least volatile asset classes in the real estate sector.
  • How the current financial turmoil compares to past financial crises.
  • Where Craig believes the most risk lies in the current market.
  • That $6.1 trillion figure, and what’s become of it.
  • For those who have withdrawn from the stock market in recent days, does an Opportunity Zone investment make sense?
  • The biggest takeaways from the final IRS regulations on Opportunity Zones.

Featured on This Episode

Industry Spotlight: OPZ Capital

The Bernstein Companies is a third-generation Washington, DC-based real estate developer that has been in business for over 85 years. The OPZ Capital Opportunity Zone Fund is The Bernstein Companies’ subsidiary private equity fund, focused exclusively on making Opportunity Zone Fund investments. OPZ Capital’s goal is to provide investors with a fully diversified portfolio of Opportunity Zone Fund investments across a variety of product types, with a specific emphasis on multi-family housing in urban locations.

Learn more about OPZ Capital:

About the Opportunity Zones Podcast

Hosted by founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host Jimmy Atkinson. Speaking with me today to discuss the impact of the COVID-19 pandemic on financial markets and opportunity zones is Craig Bernstein. Craig is principal of OPZ Capital, which launched the OPZ Capital Opportunity Zone Fund in 2018. He joins us today from his home office in Washington, DC. Craig, always great to speak with you. Welcome back to the podcast.

Craig: Appreciate it. Thanks, Jimmy. Pleasure to be here today. And I hope everyone out there is staying safe and hopefully successfully coping with what’s been going on lately.

Jimmy: Yes, absolutely. So this is actually the first podcast interview that I’ve done since the COVID-19 pandemic really hit the United States. We’re recording this on March 19, 2020. I’m not exactly sure when this is going to come out, but I think I’m gonna try to get this episode out pretty quickly, Craig, because I know we have a lot of timely things to discuss.

So first I do want to talk about the coronavirus pandemic, the COVID-19 pandemic that is spreading across the world and has forced a lot of people to stay home and has really shut down large swaths of the U.S. economy and the world economy, really. So, Craig turning to you now, you have relationships with a lot of investors, a lot of family offices. From speaking with people in terms of loans, lines of credit, tenant issues, what are you hearing exactly right now? What are your big takeaways from what’s going on out there right now?

Craig: I came from a family office background, I mean as you mentioned, and a lot of the conversations I have really are focused on speaking with chief investment officers. Right now within the past 2 or 3 days, it seems like this has really gone from 0 to 100 and right now there is a lot of concern and a lot of wait and see. There has been significant tightening in terms of monetary, more so bank lending standards.

And several families I’ve spoken with, I’ve seen the coin in both sides of it. On one hand, there are several families that are looking at drawing down their lines of credit to have available capital if needed either for potential buying opportunities or… I think they’re concerned that if they try to draw on the line, you know, two weeks or three, four weeks from now they’d have a difficult time. The flip side of that coin is there are other families that had outstanding loan balances already. Some of them were drawn down on margin lines and utilized for purchasing various assets, some in public equities that have been called away.

The banks are taking a very, very cautious approach right now and the feedback that I’m receiving from a couple larger banks that I’ve spoken with is their biggest fear now is deposits leaving which would have a significant impact on kind of their own ratios, lending ratios to ensure they have the appropriate liquidity levels.

Jimmy: Right. So obviously a tightening of the credit market and a lack of liquidity or at least concerns over lack of liquidity. And we’ve seen the stock markets really plummeting here over the past couple of weeks, so a lot of uncertainty in the real estate marketplace and in the stock markets. Craig, longterm though, how do you think this is going to affect the real estate marketplace? And now tying in with opportunity zones specifically since this is the “Opportunity Zones Podcast,” how specifically, Craig, do you think this is going to affect the opportunity zones marketplace longterm?

Craig: Well, I think at this point as we sit here today and kind of right in the center of it and the thick of things, I mean this is obviously a situation that’s evolving on a daily basis. When we look at REITs and publicly traded REITs, which I think is, you know, you’re looking at some names that are down 40%, 50%. Yesterday you look at a Marriott, it’s down 30%, Wynn Resorts, it’s now down I think 65%…I think I saw 65%.

I think there’s definitely a lot of fear and now is not the time to be making drastic decisions. My biggest concern for the real estate sector moving forward is vacancies. I think that you are gonna see some smaller businesses, both primarily on the retail side of the equation and some smaller office tenants, more people that are in kind of that startup world, unfortunately, succumb from an economic perspective that might’ve been triggered by this virus.

The other sector that is causing me a great deal of concern right now is also the hospitality space. When you’re talking to hospitality operators, some of these hotels right now that would normally be running at a 60%, 70%, 80%, 90% occupancy level are at 1%, 2%, 3%. Some hotels altogether shut down as you have seen in some places, as an example in Las Vegas, where you’re seeing large swaths of properties. We mentioned Wynn but if you look at a Las Vegas Sands or an MGM Resorts that just right off the bat are closing down operations across the board.

The biggest question I think people need to ask is when you look at these companies or your own portfolio is what does your balance sheet look like? What is your debt obligations? What are your liabilities? Where’s your breakeven point? Unfortunately with sheet capital, part of the problem is that people really levered up properties and sucked out a lot of equity that had built up and really accrued over the past three, four years.

Unfortunately, I think that, you know, there are gonna be some people that are in trouble, which I think ultimately will create potential buying opportunities. But at this point in time, I think it’s premature to speculate where the opportunity set will lie and how the opportunities will be presented to us potentially.

Jimmy: Right. So I think as you pointed out, obviously one of the hardest hit areas is going to be hospitality, tourism-based properties, hotels, casinos. And specifically, as you mentioned in Las Vegas, the MGM Resorts and the Wynn Resorts that took the unprecedented action of shutting themselves down. Not too long ago, I believe that Las Vegas actually then shut down everything else in the city. They came in and later told everyone else to shut down as well.

So getting back to your storm analogy, I kind of agree that is where we’re at right now where it does feel like we’re in the middle of the storm and it’s very hard to see. It’s very hard to see any clearing on the horizon and there is a lot of uncertainty, so it is kind of difficult to predict the future at this point in time when you really can’t even see through the clouds. But, Craig, do you see any value in any specific asset classes in real estate? I know you were a little bit reluctant to pinpoint any specific area in your previous answer but do you think there might be anything that may come out on the other side of this all right where you see any value, any insight there?

Craig: Yes. I mean, I think that majority of the people that are listening today, I mean for the most part, I would imagine then all the listeners went through the 2008 recession. Every time America has shown tremendous amount of resilience. If we look back at kind of even the dot-com bust and then 9/11, 2008, I think that this will go down obviously as a major historical event in the United States and we always seem to find a way to bounce back.

So far the administration has taken a very proactive approach to providing ample liquidity into the marketplace. I see no reason why the economy won’t bounce back. The question is how long does that take for businesses to go back and for people to start traveling again and offices to open up and real business and GDP start to accelerate again. Some estimates have said by the summer we could have a little bit more clear visibility.

I think at this point in time the real focus needs to be on obviously a vaccine. And does this drag on 12, 18 months and change life the way we know it? It probably does. I mean I think if anything it provides awareness. In terms of opportunity set, I mean, I think that the opportunity that will present itself, as I mentioned, I mean hospitality, there will be good hotels that for whatever reason, some due to maybe potentially financial engineering of the existing ownership group that will create buying opportunities.

In addition, and I still think that multifamily is very interesting and occupancy levels if people still do have a job, so to speak, that occupancy levels of buyers that might’ve been historically looking to acquire a home and go more to first sale type of property, will be staying in rental property longer. So again, that’s something that from a… Everything we’re focused on really is focused on capital preservation and trying to mitigate risk. And I still believe that even given this recent turbulent times, that multifamily will be one of the least volatile asset classes specifically within the real estate sector.

Jimmy: Right. Craig, you brought up the past recession. I’m curious now, how does what’s happening right now in the financial markets compare for you personally, Craig, if you want to compare this to past crises, past financial crises, throughout the course of your lifespan? You can go back to the recession of 2008, 2009, go back to 9/11, go back to the dot-com bust at the end of the ’90s. And now I’m sure some of our listeners are old enough to remember very well the savings and loan crisis of the ’80s as well. How does what’s happening right now though, Craig compare for you personally?

Craig: I mean, that’s a great question. I mean, I think for me personally, yesterday, and again today is Thursday, March 19th, and obviously this has been a day by day, yesterday, which was March 18th was the first time in the afternoon I mean after the President addressed the nation that for the first time in the past month, to me at least, it felt kind of like a week. And what I mean by that is when you looked at the equity markets and started seeing things, let’s use Wynn Resorts as an example and you say, Oh my God, it’s at $52. Whoa, you look again, it’s at $50, $48, $46, $44.

It was the first time in my opinion, where, you know, for the most part, while the sell offs had been brutal for the equity markets and we’re seeing these volatile swings, it’s been pretty orderly. And what I mean by that, I know that sounds scary to say, but if you look at the charts or you’re watching it intraday is it’s very kind of smooth. You’re not seeing huge gaping holes in the Dow or NASDAQ or S&P when these drops are occurring.

When you start seeing very, very wide spreads between bid and ask on names and they are $1, $2 wide that to me is scary and indicates a significant lack of liquidity. Where we are seeing that lack of liquidity now in those wide spreads really is in the credit markets starting first with, you know, investment grade corporate bonds, then going to more kind of high yield bonds, even the treasury markets two, three days ago. And I think the government and the treasury department have done an excellent job ensuring that there’s ample liquidity in the market to help absorb any liquidity concerns.

I do have real concerns about kind of the high yield market, and I think that that could have, I’m not saying it’s if we look back, could that be the 2000 as we had the housing off and when you look at know CNBS and mortgage-backed securities affecting the market being a real catalyst for the ’08? I think that there is significant amount of excess in the market in some of these junk bonds and kind of companies that are B-rated, etc., that unfortunately won’t make it and this could be the tipping point for them. Right now that’s, if we talk about something that keeps me up at night, and again from a real estate perspective, obviously vacancies, but it’s all tied together from both a consumer spending perspective and business perspective. And right now it’s a global economy and everything is intertwined.

Jimmy: Right. Craig, that’s a really good point you bring up there the concerns about the high-yield bond marketplace, junk bonds and the ability of the debtors to pay back those creditors, those bondholders, I think that’s a real concern there. That’s some good insight, Craig. I want to tie this conversation back into opportunity zones now for a little bit here as we wind down our conversation. And I’m gonna set a number that was touted by the Treasury Department and other backers of the opportunity zones when that incentive first started going toward the end of 2017 after the TCJA was passed and the number is $6.1 trillion. And that was the amount of money that was really eligible to be invested into opportunity zones.

What it is, is the amount of capital gains that were on the balance sheets of both individual investors and corporate investors at the end of 2017, as of the end of 2017. And as you know, 2018 and 2019 went on and that number kept climbing up, up, up as markets reached new heights. But now we’ve been in a market decline for the past couple of weeks and markets are below their pre-2018 levels now. So what’s happening here, Craig, is, well, I think my main point is I think there’s two sides to this coin. I think on one side you have people who may have been participating in the drawdown over the past few weeks selling their stocks and mutual funds and ETFs in the stock market. And potentially they’ve recognized quite a bit of capital gains over the past couple of weeks during this drawdown period.

But on the other side of the coin, I don’t know if you may see this the same way I do, but I see a potential buying opportunity here. I don’t know if we’ve hit bottom yet, but, you know, one way or another if you buy stocks today, you’re buying it at about 30% cheaper than you would have just a couple of weeks ago which is somewhat enticing. So what are your thoughts on what’s happening here, Craig? And what’s happening with that number, that $6.1 trillion figure, and is there an opportunity here potentially one way or another?

Craig: I mean, I think that the big thing is when we throw around that $6 trillion number that came out in kind of the first quarter of 2018 when the program first started, let’s just look at something that we can all relate to, and Apple as an example. At the beginning of 2018, if my memory serves me correct, I think Apple was at probably about $180 a share. It then went up to about $320 a share. I believe it peaked around…I think it was about at $1.5 trillion market cap.

Today Apple is probably just over a trillion dollars, maybe $1.1 trillion. So I think that part of it is, and the comment of the $6 trillion, the $6 trillion, given the tremendous rise we had last year specifically really in the NASDAQ when you looked at an Apple and an Amazon, Microsoft really, really accelerating, probably took the gains closer to $9 trillion, $8.5 to $9 trillion. I still think there’s a tremendous amount of gains that are available in the marketplace. The issue really comes of risk.

And when you look at baby boomers right now and I circled with my parents and you know, family, friends and they’re scared right now. You know, do they want to go through a long drawn out? If you’re 75, 80 years old, do you want to go through a protracted period right now of uncertainty? I think we are gonna see several people that are withdrawing and might’ve before considered going to an opportunity zone and maybe saying, “Hey, I’m gonna wait it out on the sidelines.”

That being said, there are a significant number of people that are saying, “Hey, I do want to make this investment because my alternative is bonds.” And if you look at the 10 year treasury right now at 100 basis points, 1% and you could get 5%, 6% on a risk adjusted return basis in real estate that’s a pretty compelling argument if you’re able to buy high-quality real estate in major metropolitan areas once this virus and kind of the pullback we’re experiencing now and uncertainty subsides.

So in summary, still a tremendous amount of games out there, trillions of dollars, real opportunity once the dust settles. And still a significant number of retirees that will be seeking, you know, if you can get four or five times return comparing 1% to 4% or 5%, 6% return in real estate, I still believe that real estate will play a very, very key component and is a very critical part of individual investors’ overall asset allocation model.

Jimmy: I think you’re absolutely right there. And you know what? Craig, I got to believe that over the past couple of weeks there have been a lot of people who have withdrawn from the stock market. You know maybe you’ve taken a little bit off the table here during this drawdown over the past couple of weeks. If that’s the case, you almost certainly have a substantial amount of capital gains obviously that depends on how long you’ve been invested and how much you’ve had invested and that’s gonna vary from investor to investor.

But if you’ve sold any stock within the past couple of weeks there’s a very good chance that you have at least some capital gains. And maybe opportunity zones is something to keep in mind, investing in an opportunity zone fund, diversifying your asset allocation a little bit and taking advantage of this great tax program there. You know, I’m not saying you have to invest in opportunity zones today. The fact is actually you have at least 180 days depending on how the capital gain was recognized, if it’s through a partnership or individually, you have at least a few months to figure it out, anyway. So it might be an interesting way to diversify your portfolio. As you said, you know, the alternative could be bonds. So, you know, you’re not gonna get much return there. So it’s something to think about.

Craig, I actually want to talk with you about the regs actually shifting away from the financial markets now for a minute. I don’t want to go into too much detail right now. I know we’ve covered that in great detail over several of my most recent episodes here. But I do want to get your thoughts briefly, for you and for your firm OPZ Capital, what’s been the biggest takeaway from the new regs and how has that affected your deal flow over the past few months?

Craig: I think that the biggest thing has been Treasury has made it very clear from the beginning that they want to ensure widespread adoption of the program. I think if anything, what’s transpired here over the last eight weeks with the virus further ingrains the significance and the importance of trying to allocate capital into areas that have been left behind by the previous economic recession. I think that some of these areas are also…might be get hit a little bit harder as people that are working in retail and hospitality space that might be living in some of these areas potentially end up losing their jobs.

So I think that opportunity zones and the willingness to invest in these areas is a very, very critical piece of the work that we can do to try to not only make investments that are made in a tax efficient manner but also have the ability to positively impact thousands of lives across America. When you look at the regulations specifically, I mean, there were some new language specifically relating to section 1231 gains that I thought was very interesting in terms of previously since we’re specifically addressing real estate, real estate owners that were exiting transactions had to wait until the end of the year. Now they have the ability to make those investments effectively when the transaction occurs prior to waiting until December 31st.

The second thing that’s a major change and what I view as a benefit is flexibility surrounding that 180-day period. Previously it stated if you had a K1 gain you really could either make it when that sale occurred, the date of the transaction occurred. If you were gonna get a K1 on December 31st, the 2nd day would then be December 31st. Treasury provided further guidance that now allows you to go to April 15th the first date for tax filing, not factoring in any extensions to make that investment. What that effectively means is you now until September 15th to allocate your capital.

To bring us to a simple real life example, if you sold your Apple stock in a family partnership last February, February of 2019, you’d effectively have now until September of 2020 of this year to allocate the capital into an opportunity zone fund. So that sure provides a tremendous amount of flexibility where people before were very concerned about working in these very narrow bands and windows. Additional changes to the regulations that I thought were interesting, we spoke about hospitality briefly, but now they’re saying, which is a big concern about hospitality is that you can incorporate as an example, furniture and fixtures. So any improvements you make in buying a new bed, armoire, nightstand that is put into the facility, hotel, motel, whatever it might be, could be applied towards your substantial improvement test. In addition, you’re now allowed to have a small piece of the business, meaning the hotel for a sin business.

So before people were concerned and a lot of revenue is derived from beer, wine and liquor sales, now you can have a small piece of that lobby, have a sin business in there effectively selling liquor, which was a major concern as a majority of hotels now do have some type of amenities to create kind of more of that live-work-feel environment. So just as a quick little summary, those are three little quick little bullet points.

Jimmy: Well, that’s great Craig. I think those are all three great bullet points there, especially that third bullet point. Especially in these times, I mean, you’re gonna want to go down to the hotel bar for a drink these days, right?

Craig: Definitely given what’s going on, if anyone’s at the hotel.

Jimmy: Well, that’s a very good point too. Well, Craig, it’s been very insightful. Thanks for joining me today. I really do appreciate you taking the time to join me during these uncertain times. And you’ve been a very steady voice today and I think that…well, I know that I appreciate that and I’m sure my listeners do as well. Before we go, can you tell our listeners where they can go to learn more about you and OPZ Capital?

Craig: Absolutely, I can also be reached at [email protected]. And then also I’m very active on LinkedIn and post a lot of articles. And if anyone has any questions about the program as a whole, deals we’re seeing, I’m more than willing to help and get them pointed in the right direction. And I appreciate you having me on today, Jimmy. I hope everyone stays safe. Use this as an opportunity to spend some time with your family and we’re gonna come through this and we’ll end up being stronger than we were before.

But I think that everyone right now, I think we need to show some patience. And we will, we’ll identify a vaccine. And right now it might seem scary but the world’s not ending. I don’t think we’re in a similar situation from leverage that we were in ’08. I mentioned high yield, I think it’s one area that could be very susceptible, but I think we’re gonna be okay. It’s gonna take some time but the show is gonna go on so to speak. But stay safe and spend time with your family. And I appreciate you having me on.

Jimmy: Well, Craig, I agree 100%. And I could not have said it better myself. And again, I really appreciate you coming on the podcast today. This has been great. For our listeners out there, we will have show notes for today’s episode on the Opportunity Zones Database website. You can find those show notes at and there you will find links to all of the resources that Craig and I discussed on today’s show. And I’ll be sure to link to Craig’s email address as well as his LinkedIn account so you can follow along with what Craig is seeing and hearing and what he’s posting on there. Craig, again, I really appreciate you taking the time again to join me today and all my best to you and your family.

Craig: My pleasure. Talk to you soon. Thanks, Jimmy.