Commercial Investment Real Estate Summer 2020 | Page 27

Photos by: Javier Zayas Photography (mask), EschCollection (background)
What a difference a pandemic can
make to an economist’s forecast.
Earlier this year, the most influential
topics in my 2020 outlook questioned
if the longest economic recovery on record
could continue; would the 2020 presidential
election impact the economy; and how national
and state fiscal health would affect the
U.S. economy.
Considering how the COVID-19 pandemic
is suppressing both the economy and
state of commercial real estate, I’m reminded
of a humbling quote from Winston Churchill
that all economists should note, because it
recognizes the uncertainty in forecasting:
It is not given to human beings —
happily for them, for otherwise life would be
intolerable — to foresee or to predict to any
large extent the unfolding course of events.
The two categories of data likely to
reliably foretell recovery from this pandemic
are corporate earnings and transportation
metrics, specifically Transportation Security
Administration passenger count and rail
traffic. The transportation metrics tell us
when goods and materials will start moving
again and at what trajectory (i.e., demand)
to influence gross domestic product. Corporate
earnings, meanwhile, reveal important
behavior — such as capex spending and
layoffs/rehiring — that will influence re-employment
and renewed demand for CRE
space. This latter category, corporate earnings,
grounds me in another piece of sage
Churchillian advice that emphasizes behavior
over words — or guidance statements in
corporate earnings:
I no longer listen to what people say, I
just watch what they do. Behavior never lies.
First, though, our real estate industry
should prepare itself for both:
1. More worst-ever economic reports
on jobs, manufacturing activity, and
GDP contraction.
2. A W-shaped recession (aka a doubledip
recession in which a second
contraction in the economy occurs
following an initial recovery).
The economic lift from states reopening
businesses this summer will likely be followed
by a contraction in the fall or winter
into 2021, as holes not plugged from initial
fiscal and monetary intervention will be revealed.
What holes am I referencing? Some
include the slew of bankruptcies to follow
in leisure and travel, the retail sector, small
businesses, and manufacturing — from autos
and airplanes to equipment and housing.
Some of this bankruptcy activity is already
underway with announcements by rental
car companies such as Hertz and Advantage.
However, many more are expected as
CARES, Paycheck Protection Program 1.0,
PPP 2.0, and Main Street fiscal and monetary
intervention programs wind down.
Before examining different property
types in this COVID-19 environment, I want
to examine some revealing resources and
metrics that will most influence 2H2020
outlooks and answer the question: When
will we know we are beyond the COVID-19
recession? There are five primary influences:
1. Success of states reopening businesses
and a relapse of COVID-19 in a sort of
rolling hot-spot fashion until we have
a vaccine. The Johns Hopkins University
of Medicine COVID-19 dashboard
tracks coronavirus cases by country,
state, and MSA. Except for Alaska and
Hawaii, cases continue to rise — and
have increased from just under 900,000
globally at the beginning of 1Q2020 to
surpassing 7 million the week of June 8.
The U.S. has the most cases of any
country by a multiple of 3.5 times,
topping 3 million in early July, with
outbreaks moving from the coasts to
many Southern states.
2. Employment and housing metrics.
Does anyone recall when unemployment
was below 4 percent era in 2019?
Prior to the June jobs report, the Total
U6 Unemployment Rate rose to 22.4
percent (and remained at 21.2 percent
in the June, or double that of the Great
Recession). Also, persons filing jobless
claims from mid-March through May
exceeded 40 million. Additionally,
many of those unemployed were either
delinquent in their mortgage/rent or
already availing themselves of some
sort of housing payment forbearance
program. The percentage of homeowners
with a forbearance agreement
increased to a record 8 percent through
May 2020, or eight times prior peak
levels. Also, the ratio of homeowners
who are delinquent in their mortgages
doubled from the beginning of March
through May, to 6 percent. The full impact
of this kind of job loss has yet to be
felt. It is being cushioned at some level
by extended paid leave by companies,
extended unemployment insurance
benefits from the CARES legislation,
and loan/rent forbearance programs.
As these programs wind down later this
year and into 2021, the true discovery
process begins. Look to metrics like
small business failures, bankruptcy
filings, declining homes listed for sale,
and increasing days-on-the-market
(DOM) housing metrics for what lies
ahead. Forget creating two million
jobs in 2020 like we did in 2019 or 1.5
million new housing starts, as expected
the beginning of 2020. Monitor when
we return to just 300,000 jobless
claims per week and hope the end of
loan forbearance programs in spring of
2021 won’t result in another housing
foreclosure crisis.
3. Transportation metrics. The TSA passenger
count metric is the best overall
measure of how the U.S. is recovering
from COVID-19. If business and leisure
travelers return to flying at levels near
1.5 million passengers a day, we are on
a good trajectory toward full recovery.
If, however, they stay recessed to less
than one million passengers per day,
the economy is not recovering to a level
that will drive unemployment below 10
percent. Other transportation metrics,
like rail traffic by the American Association
of Railroads, will tell us not only
when the supply chain is normalizing,
but if demand is recovering and items
like autos are once again moving by rail
from factories to dealerships.
4. CRE transaction activity. In 2Q2020,
Real Capital Analytics began to show
the decline, but some confusion remains
as to what is driving it. Most assume
it is declining demand. However, the
quarterly mark-to-market accounting
by pension fund investors may be the
greater influence. By end of the second
quarter, Pension Real Estate Association
(PREA) reports that its members
will have to mark their $2.5 trillion
of CRE investments to market for the
impact of COVID-19. This event is
driving capital to the sidelines until they
understand the valuation implications.
They can then reallocate capital from
hotel and retail to multifamily and
industrial, for example.
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