Let me preface by saying that I am absolutely and completely in awe of the strength and resiliency of the entire world working together on this humanitarian effort to bring an end to this pandemic. Those on the front lines who are fighting this war together will ultimately make our entire globe stronger and more connected than ever. Many subject matter experts are producing tremendous amounts of meaningful information specific to the medical side of this situation. As I am not a medical professional, I will not even remotely attempt to pass judgment or speculate on anything medically related. My background is in business, and therefore I will focus this publication on the business and economic aspects of this pandemic. But know that aside from the ‘numbers’, the most important issue for everyone to focus on is stopping the spread of this virus.
Today, business owners are not only concerned about their families and the spread of the pandemic, but they are also concerned about the families that rely on them, their employees. Everyone is trying to wade through piles of information, much of which is misinformation, to determine their next steps in getting through this crisis. For those of us in hurricane-prone areas, this pandemic is just like a hurricane. Your first inclination is to protect your home, your business, and your family. The next stage is you sit and watch the ‘spaghetti models’ endlessly hitting the refresh button on your computer hoping it doesn’t come your way. During a hurricane, business owners who have already built contingency plans for such a situation begin to implement those plans. Businesses that did not have a plan start to scramble to figure out their next steps to keep their business alive. Everyone is planning for the worst and hoping for the best. Just like a hurricane, geographically there will be areas that will feel the impact much greater than others. This pandemic will be absolutely no different. Case in point, this is the John Hopkins COVID-19 Dashboard Map as of today 3/27/2020. China which is considered the place of origin is now in recovery, and it is clear some areas were impacted significantly while others had minimal impact. And just like after a hurricane has hit, once we see where the damage has taken place those who were less impacted quickly mobilize to help those who need help the most.
So to follow are my best estimates of what we can expect in the short-term, mid-term and beyond.
In the short term, defined as being March-April, I believe we can logically expect the following:
1.) Millions of employees out of work, rent payments, car payments, and mortgages will be late or deferred. The great news is that our banks and landlords have gained great experience during the great recession. Instead of waiting to react, as they did in 2008, they are moving proactively to go ahead and address the issue. They are not acting in an adversarial way. They are proactively telling their customers if you need help just let us know. “We are here for you.” Because what they learned in 2008 is that those companies that they helped survive will be clients for life.
2.) Consumer spending has all but stopped, other than household goods and groceries. This will have a tremendous impact on GDP and will likely be the largest decline in history.
3.) Sales for restaurants, bars, and hotels has nearly completely stopped. Many hotels are less than 1% occupancy and the industry estimates it is losing $500 million a week.
4.) Real estate sales have stalled and contracts to purchase are being extended. Leasing will slow significantly over the next couple of months with many tenants choosing to remain in place and ask for short term lease renewals.
5.) Construction projects that are underway will continue business as usual. Those that have yet to start may delay starting temporarily. Those projects in the early planning phase will likely be postponed.
In the mid-term, as defined as being May-August, I believe we can anticipate the following:
1.) 40% of workers go back to work by the end of May, 70% by June. Remaining 30% absorbed over the next 12 months. The Stimulus Package will help these groups catch up from March’s loss of income and unemployment should help with getting them through the summer.
2.) Consumer spending will likely follow the same trend as above. Consumer confidence will remain low for the rest of the year.
3.) The Stimulus Package aimed at helping small businesses will take a little longer to implement but should be in full swing by the end of April. So those that can weather the storm through April on their own we likely survive. Restaurant and hospitality will be the hardest hit in 2020. Many in these industries will see sales levels substantially lower than normal, leading to higher debt and lower cash. Other businesses outside of those two industries will see a much less significant impact on sales with most running only slightly less than their normal year over year revenue. For those businesses, it will mean slightly lower cash on hand and slightly higher short term debt.
4.) I expect residential real estate sales to bounce back fairly quickly. Commercial sales will be a little slower to recover. Business owners will be more trepidation to purchase due to their desire to hold onto liquidity. Leasing will be slow through the summer while companies replenish their cash positions.
5.) Some construction projects will be put in holding patterns. Investors will want to see pre-leasing activity improve before pulling the trigger to break ground. You may likely see projects be split into smaller phases and/or separate contracts for site work and vertical construction. Construction supply chains may see some interruption but as long as building timelines are not overly optimistic they should present relatively low levels of risk. Cost to build will likely come down due to trades cutting their profit margins to ensure a solid supply of work through the rest of 2020.
In the long term, as defined as being 2021 and beyond, I would expect the following:
1.) In 2008, corporate America and the financial industry learned an extremely valuable lesson in why a company’s balance sheet is so important. 2020 will prove to be the year that all consumers and small businesses learned that same lesson. For anyone that was not a saver, they will be now. Unfortunately, I am not sure all will have grasped that concept completely but I think some will. Unemployment should likely recover to levels below 6% in early 2021 and back below 5% in late 2021.
2.) As we move into 2021 consumer sentiment and spending will begin to recover and likely return to levels we were experiencing pre-pandemic.
3.) There will be businesses that fail during this time. They are likely the same ones that already had trouble paying rent before the pandemic. The stimulus package will keep many small businesses from failing. Those who have good working relationships with their bank will likely be getting calls soon from their bankers telling them how to access stimulus funds.
4.) The small businesses that do fail will add more inventory on the real estate market and that additional inventory will need to be absorbed. I don’t anticipate that being a huge number but it will have an impact. The additional inventory will temporarily cause vacancy rates to increase and rental rates to decrease. My advice is for sellers who don’t need to sell, hang on for a little while this will be temporary. Real estate markets that will be impacted the most will be in the epicenter of the outbreaks. Markets that experience limited impact from the pandemic and can get back up and running quickly will suffer the least and be back to normal the fastest. Businesses will begin to rethink work from home and remote working. However, it is important to note this has already been happening for the last several years and this pandemic will just show employers that it can be done. But, I suspect employees having now experienced the social disconnect that is created by this forced work from home status will likely grow in their appreciation for working collectively in a traditional work environment. So yes it will create some change, but it will not be the sweeping changes that people think. I believe the area that will see the largest change will be industrial and manufacturing, which was already experiencing great success. Post-pandemic manufacturers will rethink the concentration of their supply chains oversees. They will begin bringing back manufacturing to the US, not wholly but in part, to improve their supply chain strategies. This will create a mini-industrial boom for the US over the next 5 years.
5.) Construction pricing will improve which will be a good thing for the economy. Construction pricing has caused housing unaffordability and slowed development growth. In certain markets this has caused over-concentration of product types. When construction pricing corrects it will have a positive impact on the entire economy.
Conclusion: Pre-pandemic the underlying economy was the strongest it has been in history. As an aside, if this was going to happen, you couldn’t have picked a better time from an economic standpoint. Cases in point, think about it if this had happened in 2008. Because the economic issues at hand are caused by a virus/natural disaster and not underlying economic problems, the way forward to improving our economic conditions are tied to curing the virus and not massive long term overhauls of our financial system or corporate greed. Everyone agrees we will find a cure and the US government has stepped up to remove barriers and shorten the time to get drug trials underway.
The media has (like they always do) created complete panic over misinformation and terrible reporting. Moving forward before you hit the ‘share’ button, fact check. When you strip away the politics of this matter and go straight to the subject matter experts for accurate information you will be at ease.
The take away is this, Stay Calm, Be Safe, Use Good Judgement. Thank the everyday medical heroes and first responders keeping us all safe.
This Too Shall Pass.
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