COVID-19, Volatility and U.S. Commercial Real Estate

COVID-19, Volatility and U.S. Commercial Real Estate

While severe, we believe that the COVID-19 shock is likely transitory, and remain optimistic about the long-term U.S. economic outlook and real estate fundamentals.

Note: this report was drafted before the broad spread of the coronavirus and does not address the potential impact on the U.S. economy and commercial real estate investments. Clarion Partners will communicate with clients on the anticipated impact as we gain better clarity on the duration, scale, and severity of the outbreak.

Executive Summary
  • The COVID-19 pandemic was completely unexpected and is still developing globally, causing both supply shocks (supply chain disruptions) and demand shocks (social distancing, travel restrictions, and lockdowns).
  • While the U.S. is fighting to mitigate further spread, several other countries including China and South Korea may offer strategies and practices on how to contain the virus effectively.
  • Both the U.S. Federal Reserve and federal government are taking swift actions with unprecedented monetary and fiscal stimulus programs (approximately $6 trillion combined or 29% of annual GDP).
  • Thanks to tighter financial regulations and annual Fed stress tests, U.S. financial institutions today are not as over-leveraged, and the overall credit market is not as stressed as during the GFC period.
  • The reality is that the situation is so new and fluid that it is very hard to predict what the effects will be. The shape of the recovery will depend on how effectively the outbreak can be contained and when a vaccine or cure will be developed.
  • U.S. commercial real estate is impacted by the fallout. Some sectors, such as hotels and retail, will take a hard hit immediately while others may be relatively stable with long-term lease protection. Industrial and multifamily appear to be relatively defensive compared to other sectors.
  • Historically, stocks tend to overreact to unexpected macro events quickly. Public REIT pricing has exhibited much higher volatilities during past downturns and often is not representative of the private real estate valuations.
  • Commercial real estate property valuations are primarily determined by current income, appraised property values, and sales comps in transaction markets. Thus, they normally react less to the volatilities in the public market.
  • The starting point matters: before the COVID-19 crisis, the U.S. real estate market had manageable new supply, at or near cycle-low vacancy rates, relatively low leverage, and wide cap rate spreads over 10-Year Treasury or Baa bond yields, which should help mitigate some value declines.
  • While severe, we believe that the COVID-19 shock is likely transitory and pent-up demand should return once the outbreak subsides. We remain optimistic about the long-term U.S. economic outlook and real estate fundamentals.



The COVID-19 pandemic was completely unexpected and is still developing globally. There are still many unknown facts about this coronavirus and its transmission. Based on published information, this new virus belongs to the same family as SARS and MERS, is much more transmittable, but has a lower overall fatality rate (higher for the older population and those with pre-existing health conditions).

While China has taken the hardest hit to date, the most recent data shows steep declines in daily new cases there, suggesting that its strict containment has worked well (Figure 1). Satellite imaging and pollution data suggest that approximately 80% of Chinese businesses and operations have already resumed. Starbucks has re-opened 95% of its stores, and Apple has re-opened all its 42 stores in China. Still, China accounts for 20% of global manufacturing activity and is deeply imbedded in the global supply chains. Global supply disruptions in China and other countries will hurt the earnings of U.S. businesses in the near term.

Figure 1: Total Coronavirus Cases In China And Ex-China (as of March 26, 2020)

Source: Washington Post, CDC, WHO, as of March 26, 2020.

Outside China, there have been large outbreaks in South Korea, Iran, Italy, Spain, Germany, France, and the U.S. as well as new cases in numerous other countries. The question remains whether these countries have effective public health measures and resources to keep the coronavirus from spreading further. It is encouraging to see the declining number of new cases in South Korea recently after drastic changes in measures including extensive testing and strict isolation. On the other hand, the accelerating number of new cases and deaths in Italy and Spain is alarming, although their large older populations have played an important role.

As of March 26, the U.S. has 82,547 confirmed cases, and the number of new cases is rising quickly as more tests are being conducted nationwide. Stricter public health measures, such as travel restrictions and regional lockdowns, have been implemented in an attempt to mitigate further spreads, but the U.S. will likely have difficulty implementing the strict measures that have reduced spread in China and South Korea.

How could the COVID-19 outbreak play out? Like the past virus outbreaks such as SARS, it is possible that the coronavirus outbreak might subside as the weather gets warmer in the spring. In the case of SARS, the number of new cases peaked at the end of April in 2003 and largely tapered off two months later. Whether the coronavirus is seasonal is critical in determining the possible outcomes. Alternatively, the coronavirus could stay with the global population sporadically and seasonally for an extended period with lingering impacts. Then we would have to rely on effective containment, new vaccines, or drugs to fight the virus during each flu season. Several vaccine and drug candidates have shown promising preliminary results, although a new approved vaccine might be still at least a year away.


The COVID-19 pandemic is having significant, negative impacts on the global economy, causing both supply shocks (supply chain disruptions) and demand shocks (social distancing, travel restrictions, regional lockdowns, and decreased spending). Certain industries, such as airlines, tourism, and hospitality, are experiencing a sharp decline in demand in the near term. Many other businesses are evaluating the developing situation and may pause hiring, leasing, expansions, or purchases. In addition, U.S. corporations have issued record amounts of BBB and high-yield bonds over the past several years, which may face downgrades when the economy weakens more. As a result, there are potential risks of financial dislocations due to missing payments and weak credit conditions.

Reacting to the developing COVID-19 crisis, both the Federal Reserve and federal government are taking immediate actions with strong and unprecedented monetary and fiscal stimulus responses. On March 3, the Fed made an emergency benchmark federal funds rate cut of 50 basis points (bps) and did again on March 15 by another 100 bps, taking the level back to the GFC-era low of between 0.0% and 0.25%. The Fed also reduced bank reserve requirements and initiated a new round of unlimited quantitative easing (QE) by the purchasing of Treasury and mortgage bonds as well as corporate bonds, which is a brand new $200 billion initiative. In addition, it set up several direct lending facilities to facilitate borrowing transactions with different entities. According to U.S. Treasury Department, the Fed will make up to $4 trillion in loans to businesses to stimulate the economy. Globally, all other central banks have also cut interest rates and injected billions of dollars of liquidity into the financial markets over the past few weeks.

On March 5, the Trump administration and the Congress passed the Emergency Coronavirus Bill, which included paid sick leave, free coronavirus testing for all, a food assistance program, unemployment insurance benefits, payroll tax cuts, and an extension of the tax filing deadline. More importantly, on March 25, the Congress passed the new, massive $2 trillion fiscal stimulus program, which will provide aid for businesses and checks for individuals. Specifically, it includes $500 billion in loans and assistance for larger companies as well as states and cities, and $350 billion for small businesses. For individuals, the package provides direct payments to lower- and middle-income households of $1,200 for each adult and $500 for each child. Unemployment insurance is expanded to provide an extra $600 a week on top of state benefits and was extended to up to 39 weeks.

These stimulus responses today are truly unprecedented. The proposed $2 trillion fiscal stimulus package is more than twice as large as the $787 billion fiscal stimulus package during the GFC (adjusted for inflation). The combined monetary and fiscal programs would be more than $6 trillion, which is roughly 29% of the U.S. annual GDP output of $21 trillion, which should strongly support the U.S. economy during the crisis.

It is still premature to forecast the severity of the downturn and the shape of the recovery as the macro environment remains highly uncertain and evolving with new developments daily. We believe that the extent of the impact on the U.S. economy will depend on three key factors: (1) how long the global outbreak lasts; (2) whether the contagion can be contained within the U.S.; and (3) how effective the monetary and fiscal stimulus programs will work to support the economy.

It is worth noting that the U.S. economy and labor market were in great shape right before the COVID-19 outbreak. The February unemployment rate was only 3.5%, a 50-year low, and the U.S. economy added 273,000 new jobs in each of the first two months into 2020. There were more job openings than the total number of unemployed people at the beginning of this year. The current crisis may be short-lived. As businesses scale back their operations, many workers, especially in the service industries, are being furloughed temporarily. However, they might be able to return to their jobs as soon as there is an effective solution to the crisis.

Regardless, it is likely that U.S. real GDP growth will take a big hit before recovering later. A recession (defined as two consecutive quarters of negative real GDP growth) seems unavoidable. While severe, we believe that this coronavirus shock may be transitory and pent-up demand should return once the contagion subsides. Using the past virus outbreaks as a guide, the U.S. and the global community should be able to pull through this crisis. We remain optimistic about the long-term U.S. economic outlook.


U.S. commercial real estate (CRE) is not immune to the fallout from the COVID-19 outbreak. Some sectors, such as hotels and retail properties, will take a hard hit immediately, while others have long-term lease protection that should support long-term stability. If the outbreak peaks over the next few months, the impact on CRE could be less severe. Conversely, if the outbreak lasts much longer or spreads more widely, large job losses and substantial cutbacks on spending would substantially affect demand for commercial space.

Hotels: The immediate impact is mainly on the travel and hospitality industry due to restricted domestic and international travel and bans on large meetings and conventions. The demand shock is severe and may last at least several months, which will result in material declines in hotel income and property values in the near term. Many hotels are closing temporarily with little demand. According to Smith Travel Research, during the week of March 16, U.S. national hotel RevPAR declined by 69.5% compared to the same period last year.

Retail: The impact on retail will be broadly negative except for necessity retail, such as grocery and drug store-anchored neighborhood and community shopping centers. Many consumers may avoid shopping for non-essential goods at malls or power centers. Besides reduced traffic, many malls and shopping centers are closed temporarily to reduce virus spread. Property income will suffer in the near term if property owners depend on percentage of sales from the tenants.

Rent relief or lease restructuring may be necessary. Most small inline tenants in neighborhood retail have weak credit and many may not survive. Discretionary retail, such as restaurants, gyms, and entertainment venues will be significantly hit in the near term by social distancing practices. In addition, luxury retail in gateway cities may see meaningful declines due to travel restrictions. Indeed, the COVID-19 outbreak may accelerate the transformation in the retail sector, which has been happening over the past few years. Some weak retailers and weak malls/shopping centers may fail as a result.

Industrial: Indications are that impacts on demand for industrial space will be mixed. On one hand, global supply chain disruptions have delayed some shipments to the U.S. For example, in February, the Ports of LA/LB saw approximately 20% decline in cargo volume year-over-year. The volumes may see a sharp drop again in March. However, capacity in China is beginning to come back and ports are pushing out thousands of TEU containers that were stranded at the onset of the COVID-19 outbreak. Live shipping data shows that vessel activity has in fact gained momentum at both the Ports of LA/LB and China’s largest port in Shanghai.

On the other hand, while shopping malls may experience reduced traffic, people are increasing online purchases and home deliveries, a trend has the potential to boost demand for warehouse space from e-commerce users. Demand for e-commerce has accelerated sharply in recent weeks, and many e-commerce retailers cannot meet delivery in time. On March 16, Amazon announced that it would hire an additional 100,000 warehouse workers and raise pay as the coronavirus causes an “unprecedented increase” in demand for this time of year. Similarly, on March 20, Walmart said it would hire 150,000 workers, in part to meet surging online demand.

Over the intermediate term, logistics managers may have no choice but to stock up more inventory going forward, switching from a “just-in-time” to a “just-in-case” strategy to hedge disruptions. This is precisely what happened after Japan’s strong earthquake and tsunami in 2011, which severely disrupted U.S. auto manufacturing. As a result, U.S. inventory-to-sales ratio reversed its long-time downward trend and rose significantly afterwards. Overall, we believe that the industrial sector will likely emerge as a big winner in real estate through the COVID-19 crisis.

Multifamily: Housing is a necessity and multifamily historically has been defensive during recessions or times of uncertainty. Demand for rentals should remain relatively stable during this period of containment. While new leasing activities may slow, renewal rates are expected to increase. Moreover, the for-sale housing market may slow down given the uncertain outlook, pushing more households to rental option.

However, how to handle leasing and maintain a safe and healthy community pose new challenges for apartment managers in the face of social distancing. In addition, there may be risk of delays in rent payment and in the ability to take action for non-payment in the new environment. Furthermore, if the U.S. economy moves into a prolonged recession with substantial job losses, household formation will slow and demand for multifamily units will weaken as a result.

Office: Office property income might be minimally impacted in the near term largely because the average office leases are 5-7 years. Tenants still have to pay rent even as they send staff to work from home remotely. Still, there are likely rent relief requests especially from smaller tenants with weak credit. New leasing activities will likely weaken amid the outlook uncertainties. Co-working operators may take a hard hit in the near term because of short-term leases with tenants. There will be negative impact on flex space demand because of social distancing and small businesses weakness.

Meanwhile, life sciences and medical office (MOB) will likely be in stronger demand. The COVID-19 outbreak is undoubtedly a significant, long-term boost to the life sciences and biotech industry because of the urgent needs to find solutions to the coronavirus and numerous other diseases and illnesses. We expect a surge in research funding, and continue to be bullish on the lab office segment going forward.

Development/Construction: Significant delays in imports may lead to shortages of some construction materials and push up costs, making development costlier or lengthier. Unavailability of government services (such as inspectors) may also cause delays. Many development projects might simply be postponed due to difficulty in obtaining construction loans and increasing uncertainties in the demand outlook. We expect new supply to decline substantially across all property sectors at least over the next two years, which should partially offset weakened demand and support real estate fundamentals in that demand may return faster than new supply.

Capital Markets: Thanks to tighter financial regulations and annual Fed stress tests, U.S. financial institutions today are not as over-leveraged, and the overall credit market is not as stressed as, during the GFC. This may be a key difference this market cycle.

Real estate capital markets are taking a pause as lenders are assessing the changing market and buyers are unable to travel to inspect target properties. Several large portfolio deals have been pulled from the market over the past few weeks. Transaction volume may stall over the next few months. The impasse will make it particularly challenging for appraisers to accurately assess property values unless there is evidence of rising vacancy and declining cash flows like in the hotel industry.

Recent market observations by CBRE suggest that commercial mortgage spreads have widened and mortgage rates have risen despite falling Treasury yields in recent weeks. Many lenders are taking a timeout (except for higher quality assets) and reevaluating lending criteria amid the rapidly changing financial market conditions. The CMBS origination market is also in a pause mode. On March 24, the Wall Street Journal reported that SL Green’s $815 million deal to sell a large New York City office building fell apart because the lender, Deutsche Bank, backed off, citing market turmoil.

It remains to be seen how lenders will adjust in the near term when more clarity emerges in the financial markets. According to CBRE, there are no obvious signs of distress yet as of the week of March 16 although some hotel loan defaults could surface shortly. It is also worth noting that when the credit market froze during the GFC, many lenders practiced “pretend and extend” (extend a loan by the current lender and pretend it can be repaid later), leading to fewer distressed sales at that time. It is possible that lenders might repeat the same in the case of borrowers’ inability to refinance or sell.

On a positive note, before the COVID-19 outbreak, global dry powder (capital raised but yet to be deployed) had reached more than $326 billion for closed-end real estate funds, an all-time high and 82% more than in 2007, according to Preqin. Investors with significant dry powder may rush in if attractive investment opportunities emerge, which may limit large pricing declines.


The COVID-19 outbreak has greatly disrupted the financial markets since late February; the S&P 500 Index experienced its fastest correction since 1928, declining 27.7% from the peak on February 19 to March 24. Similarly, public REITs (the FTSE NAREIT Equity REIT Index) were down by 39.7% from February 18 to March 24 (Figure 2).

Figure 2: Year-To-Date Performance: S&P 500 Index vs. NAREIT EQUITY

Source: Bloomberg, Clarion Partners Investment Research, as of March 24, 2020. Note: RWR, which is a NAREIT All Equity REIT ETF, is used for daily performance calculations for public REITs. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

What about U.S. private real estate returns, then? Historically, unlike public REITs, private real estate investment has had very low correlation with stock indexes, because private real estate returns are determined by current income and property values, which in turn are based on discounted cash flow models and appraisals. In general, because of lease protection, there is normally a delay of impacts on property values, which are not influenced by daily headline news. Therefore, the direct impact on real estate from a spike in market volatilities alone is normally less severe in the short term. However, if the exogenous shock catalyzed by the COVID-19 outbreak differs from historical precedent or leads to a deep and extended recession, real estate values will likely be negatively impacted.

While the COVID-19 outbreak is causing unprecedented disruption, there are historical events that we can look to for insight. Here, we examined the performance of stocks and real estate during the past three economic downturns, which may provide perspective on how a downturn may impact real estate values and total returns (Figure 3). The NPI Market Value Index represents average value change of properties within the NCREIF Index, while the NPI Total Return Index shows total returns of the NCREIF Property Index, including income return. Both are measured for stabilized core properties on an unlevered basis.


Source: Bloomberg, NAREIT, NCREIF, NAREIT, Clarion Partners Investment Research, as of March 24, 2020.Note: NPI = NCREIF Property Index (a performance benchmark for unlevered core private real estate investment). * The peak-to-trough changes were calculated from February 19 to March 24 for the S&P 500 Index and from February 19 to March 24 for the NAREIT All Equity Index, respectively. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

It is evident that both the S&P 500 and public REITs were generally more volatile during economic downturns. They tend to overshoot to the downside relative to changes in property value or total returns of private real estate. In particular, public REIT pricing has exhibited much higher volatility and often does not suggest similar magnitudes of value decline for private real estate.

The causes for the three economic downturns were quite different. In 1990-1992, restrictive momentary policy, high interest rates, and oil price shocks (post-Gulf War I) eroded consumer confidence and reduced spending. In addition, U.S. real estate had just experienced a building boom, incentivized by deregulations and aggressive lending. Elevated construction led to a 30.1% increase in square footage between 1985 and 1991. Vacancy rates were exceedingly high in many markets going into the recession. Then, when the downturn hit, property values suffered, and it took another five years to absorb the vacant space and reverse depreciation. Lack of data and slower adjustments by appraisers did not help the situation either.

The 2000-2002 downturn was rather unique, caused by the tech bubble burst followed by the 9/11 terrorist attack. Stocks declined precipitously as a result. Real estate avoided the worst results, with a 1.2% value decline. Only certain markets, such as the San Francisco Bay Area and New York City took a harder hit. In fact, the NPI total return was positive during this economic downturn, in part thanks to a strong monetary response that boosted the consumer spending. Little overbuilding or excessive leverage were key positive factors.

The 2008-2009 global financial crisis was caused by housing bubbles in various metropolitan areas, over-leveraging at banks, and a subsequent financial panic that resulted in dislocations in the credit markets. During the downturn, commercial real estate felt a combination of impacts from the capital markets and the deepest recession in a generation. Just as commercial real estate fundamentals deteriorated, risk was repriced for an extended period, which led to higher cap rates across the board. Property values would decline by 27.1% during the crisis, helped downward by “fire sales,” as certain firms sought to raise cash.

The coming economic downturn today seems very different and is caused by the coronavirus pandemic. Property values and real estate returns will likely suffer as economic growth contracts and consumers reduce spending. However, the starting point matters: before the COVID-19 crisis, U.S. real estate market had manageable levels of new supply, at or near cycle low vacancy rates, relatively low leverage, and large cap rate spreads over 10-Year Treasury or Baa bond yields, all factors that should help mitigate potential value declines. For example, according to Morgan Stanley, the average commercial real estate loan-to-value (LTV) and debt-service coverage (DSCR) ratios were about 60% and 1.8, respectively, as of Q4 2019, compared to about 70% and 1.4 at the prior market peak in 2007. In general, lower leverage and conservative underwriting should be helpful in mitigating some value decline during a downturn. Nonetheless, investors may have a better idea over the coming months as the situation continues to evolve.


Clarion Partners is watching the COVID-19 pandemic developments. The situation is developing rapidly and Clarion Partners may revise its view as new information arrives. At this point of time, it is impossible for anyone to forecast with confidence how U.S. real estate will perform going forward. We will provide new updates later as we gain greater clarity on the duration, scale, and severity of the outbreak.

Because of disruptions to businesses, operations, and daily life, global and U.S. GDP growth are expected to take a hit before rebounding later. The shape of the recovery will ultimately depend on how effectively the coronavirus can be contained. Using past viral outbreaks as a guide, the global community should be able to work through this challenging crisis. We remain optimistic about the long-term U.S. economic outlook and real estate fundamentals.

Investment in real estate entails significant risks and is suitable only for certain investors as part of an overall diversified investment strategy and only for investors able to withstand a total loss of investment.


The September 11 attacks (also referred to as 9/11) were a series of four coordinated terrorist attacks by the Islamic terrorist group al-Qaeda against the United States on the morning of Tuesday, September 11, 2001.

One basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).

A BBB rating is the lowest investment-grade rating; it reflects an opinion that the issuer has the current capacity to meet its debt obligations but faces more solvency risk than A-, AA- or AAA-rated issues.

BAA is a credit rating denoting a medium grade, moderate risk security.

The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value.

CBRE is a full service commercial real estate firm providing solutions to property owners, investors and occupiers.

A central bank is a national bank that provides financial and banking services for its country's government and commercial banking system, as well as implementing the government's monetary policy and issuing currency.

A Commercial Mortgage-Backed Securities (CMBS) is a type of mortgage-backed security that is secured by the loan on a commercial property.

Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively correlated; when they move opposite to each other, the correlation is described as negative or inverse. If price movements have no relationship to each other, they are described as uncorrelated.

COVID-19 is the World Health Organization's official designation of the current coronavirus.

Debt service ratio is the ratio of its debt service payments (principal + interest) to earnings.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The federal funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

A Fed stress test is a bank analysis used to determine whether a bank has enough capital to withstand an economic or financial crisis.

A fire sale consists of selling assets at heavily discounted prices.

The FTSE NAREIT Equity REIT Index is a free float adjusted market capitalization weighted index that includes all tax qualified REITS listed in the NYSE, AMEX and NASDAQ National Markets.

The Great Financial Crisis (GFC), also known as the Great Recession, the financial crisis of 2007–08, the global financial crisis and the 2008 financial crisis, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared.

Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.

The inventory to sales ratio measures the amount of inventory in your store compared to the number of sales you're fulfilling.

Just-in-case (JIC) is an inventory strategy in which companies keep large inventories on hand. This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.

Just in time (JIT) inventory is a strategy to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.

Middle East respiratory syndrome (MERS), also known as camel flu, is a viral respiratory infection caused by the MERS-coronavirus (MERS-CoV).

MOB is an abbreviation for medical office building.

A Mortgage Bond is a type of asset-backed security that is secured by a mortgage or collection of mortgages.

The NCREIF Property Index (NPI) provides returns for institutional grade real estate held in a fiduciary environment in the United States. The NPI Market Value Index represents average value change of properties within the NCREIF Index, while the NPI Total Return Index shows total returns of the NCREIF Property Index, including income return.

Ports of LA/LB refers to the California ports of Los Angeles and Long Beach.

Preqin provides financial data and information on the alternative assets market, as well as tools to support investment in alternatives.

Quantitative easing (QE) refers to a monetary policy implemented by a central bank in which it increases the excess reserves of the banking system through the direct purchase of debt securities.

The real estate loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a real estate loan to the value of the asset purchased.

Real Estate Investment Trusts (REITs) invest in real estate or loans secured by real estate and issue shares in such investments, which can be illiquid.

Revenue per available room (RevPAR) is a performance measure used in the hospitality industry.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

Severe acute respiratory syndrome (SARS) is a viral respiratory illness caused by a coronavirus called SARS-associated coronavirus (SARS-CoV). SARS was first reported in Asia in February 2003. The illness spread to more than two dozen countries in North America, South America, Europe, and Asia before the SARS global outbreak of 2003 was contained.

Social distancing is deliberately increasing the physical space between people to avoid spreading illness.

A spread is the difference in yield between two different types of fixed income securities with similar maturities.

The U.S. Treasury Department is responsible for issuing all Treasury bonds, notes and bills; it is responsible for the revenue of the U.S. government.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

The vacancy rate is the percentage of all available units in a rental property, such as a hotel or apartment complex, that are vacant or unoccupied at a particular time.


Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH. Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

The aforementioned Legg Mason entities are wholly owned subsidiaries of Franklin Resources, Inc.

Discussions of individual securities are not intended and should not be relied upon as the basis to buy, sell or hold any security. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

A credit rating is a measure of an issuer’s ability to repay interest and principal in a timely manner. The credit ratings provided by Standard and Poor’s, Moody’s Investors Service and/or Fitch Ratings, Ltd. typically range from AAA (highest) to D (lowest). Please see,, or for details.

Real Estate Investment Trusts (REITs) invest in real estate or loans secured by real estate and issue shares in such investments, which can be illiquid.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.

Asset-backed, mortgage-backed or mortgage related securities are subject to additional risks such as prepayment and extension risks.