COVID, The Ecomomy, and Commercial Real Estate
With the COVID -19 outbreak and the recent economic downturn, most economists tend to qualify the integrity of their forecasts, by stating that we’re in uncharted territory, that things are changing so fast, it’s hard to be precise about how bad it will get.
Even so, one thing most economists agree on is that we’re amid a recession and an economic decline that is as steep and sharp as any we’ve endured. In an April 6th article for Forbes, Bill Conerly predicted that the economy would likely rebound as sharply and quickly as it declined. If you put his prediction on a graph, you would see a “V” shape, a sharp downward slope, and a sharp upward slope leveling off before it reaches a pre-COVID territory.
Symbolism aside, the larger question that looms is, when will this forecasted economic rebound happen? Most believe it will begin in Q4 of this year, providing we deal with the COVID-19 crisis well. The longer the crisis lasts, the harder it will be to mitigate the impact on our economy.
AEI Roadmap for Reopening the Economy
The American Enterprise Institute, AEI, provides a roadmap for getting our economy open for business again. Getting our country ready to reopen for business fully will ultimately require a reliable vaccine or effective treatment for COVID-19. AEI describes reopening in four phases. It will be up to governors in individual states to implement these steps so the steps below may look different from state-to-state:
Phase 1: Slow the Spread
The US is currently in this phase, trying to get control of the public health crisis. We work and go to school from home, and social distance to flatten the curve to make sure our hospitals don’t get overrun by COVID-19 cases. As well, rapid and radical changes to the way we live have a profound (but hopefully, short-term) negative impact on our economy.
The focus of this phase is not about eradicating the disease. But, that doesn’t mean that we’re not already working on it. We are. A few treatments are getting fast-tracked; one of them is showing some promise. An antiviral drug called Remdesivir, created by Gilead Sciences over a decade ago is currently being tested and showing some promise in treating the COVID-19 virus.
The World Health Organization,WHO, reports that three vaccines for COVID are currently undergoing clinical trials, while 67 others have achieved a pre-clinical evaluation status.
Along with working toward a viable treatment and vaccine, we are also working on improving access to testing, so we can readily implement phase two and move toward phase three.
Phase 2: State-by-State Reopening
In phase two, AEI describes criteria for when we can begin to re-open for business, that relies on widespread disease testing and tracking. That way, we can determine where people can resume activities and who can return to work or school. During this phase, vulnerable populations may have to continue to social distance a while longer.
Phase 3: Establish Immune Protection and Lift Physical Distancing
In this phase, we get back to our regular lives. But, to establish the immune protection needed to move into this phase, we need to reduce the danger of death from COVID-19, by coming up with an effective treatment for the disease, or by making a reliably effective vaccine widely available.
Phase 4: Rebuild Our Readiness for the Next Pandemic
Once we beat COVID-19, we will need to turn our attention to readying ourselves for the next pandemic. COVID-19 isn’t the first pandemic we have faced. It’s not likely to be our last, given our globally intertwined economies and global travel. To protect our lives, livelihoods, and our economy, we will have to become steadfast about readiness and develop an ability to react early.
Pandemic Impact on Commercial Real Estate
Since Commercial Real Estate, CRE, market metrics typically get reported quarterly, we won’t likely get a complete picture of COVID’s impact for a little while. Here’s what we do know:
Since March, millions of people have filed for unemployment. So, it’s challenging to get rent from people right now. The National Multifamily Housing Council states that just 69% of household rents were paid by April 5th, down from 82% at the same time last year. Soon, we’ll see the results for May.
Stay at home orders have profoundly hurt retailers, restaurants, and the lodging industry as well. So businesses are having a hard time paying rent too. On April 8th, Axios reported that Staples had refused to pay landlords its April rent and wouldn’t say if it would resume payments in May. According to Fortune, Subway, and Mattress Firm recently informed their landlords that they would make adjustments to their rent or not pay to stave off some of the adverse effects of the COVID-19 crisis. After recently downgrading several Real Estate Investment Trusts, REITs, Bank of America suggested that REITS offer some leeway on rents.
Stressing occupiers, REITs, landlords, and lenders to their limit in this way is a recipe for market failure. Thus far, there is no proposed stimulus to help with commercial real estate rents.
COVID-19 is changing the logistics industry and supply chain in general. The shift to online retail to get the necessities of daily life may, in some ways, change retail for good. Before the disease outbreak, online retail held 11% of the market share. Industry projections supported the notion that online retail would likely double by the end of the decade. That increase is happening now and then some. Older Americans, typically hard-to-convince late tech adopters, are embracing online retail now. Since they may have to stay at home longer, even when social distancing ends.
The shift to online grocery shopping was already affecting the supply chain. A shortage of cold storage space that has been going on for a while. In the summer of 2019, CBRE projected a need for as much as 100 million more square feet of cold storage in five years. The pandemic is kicking cold storage into high gear. This sector was growing before COVID-19 and will likely continue for some time to come. There is plenty of potential in this industry when you consider that there’s not just a need for new facilities to fill current and future demand. The average age of existing cold-storage facilities is 34 years, so those will need replacing or refurbishing as well.
By the time we get past the COVID 19 pandemic, we’ll all be used to working from home, as well as collaborating and meeting online. Will that change how we work? Indeed, not all businesses have to have office space. Small companies and startups have been renting shared space and hoteling workstations for some time now. Those trends will likely continue and grow.
Cause For Optimism
The world is always changing. One thing we can count on is that Americans continuously adapt in ingenious and surprising ways. When we get past this pandemic, we will surely take stock of the countless inspiring ways Americans stepped up and used their creativity to help us get through this crisis. Some of these stories have already come to light:
- A young doctor and her scientist husband came up with a way to clean and sanitize N95 face masks.
- Faculty members at Purdue who are working with IU hospital and St Francis to make Personal Protective Equipment PPE and ventilator parts.
I’m sure we’ll hear many more inspiring stories like these. There are heroes everywhere; we just don’t know them yet.