Last week, I had the pleasure to moderate a GRIClub eMeeting on the COVID-19, and it’s impact on the US real estate market – Coronavirus & USA Real Estate – Crisis, Blip or Opportunity? The e-meeting had over 80 participants, including C-suite real estate executives and asset managers. My co-chairs included Andrew Miele, Head of Development for the Americas Six Senses and David Parnes, The Agency, and Star of Million Dollar Listing Los Angeles on Bravo TV.
To kick-off the meeting, I provided an overview of the macroeconomic backdrop, which is summary of a more detailed article published on the GRI website in early April titled “The Super Economic and Social Depression of 2020”
The Worst Crisis since the Great Depression of the 1930s
Over the past 2.5 months, China’s coronavirus has triggered the worst economic crisis the world has experienced in almost a century. The IMF’s recently released World Economic Outlook estimates that global gross domestic product will shrink 3% this year and mark the deepest dive since the Great Depression. Many countries in the developed world will see double-digit declines in GDP in Q1 and Q2. This is much more pronounced than the global economic contraction witnessed during the 2008-09 financial crisis. The cumulative loss in global GDP this year and next could be $9 trillion (according to the IMF), more significant than the economics of Germany and Japan combined. Every component of aggregate demand is collapsing, including consumer consumption, capital investment, and residential investment with no near-term end in sight. Just as disturbing as the demand shock, is the fall in output. Unemployment in a matter of weeks has skyrocketed across the developed world with unprecedented weekly rises in US unemployment claims, and unemployment is now over 22mm with the unemployment rate in the mid-teens and rising. We are already seeing the impact on corporate and bank earnings in Q1, and we will likely see record declines in revenues and earnings in Q2 and the remaining quarters of the year.
Forget a V Shape Recovery – Equity Markets To Dive Again
A V shape recovery has all been ruled out. Whether we see a broad U or L shape recovery is uncertain and depends on the longevity of the pandemic and its effect on economic activity. With unemployment skyrocketing, we can expect further declines in aggregate demand and output, and this will have an impact on the U.S. and global banking system, despite their relative strength. The recent rally in equity and debt markets is likely a bear market bounce as corporate earnings and projected earnings continue to be revised downward.
People Need to Get Back to Work for Economies to Function
On a positive note, those countries that have been aggressive in isolation and containment policies have shown progress. Still, for the crisis to end and economies to function, people need to get back to work so businesses can produce goods and services. The unprecedented and rapid monetary and fiscal responses can only do so much. The problem with massive fiscal packages, in some cases amounting to 10-15% of GDP, is that this will need to be monetized at some point. Government borrowing will crowd out the private sector. And in the medium term, we will likely see higher interest rates associated with this unprecedented government spending.
US Real Estate Market Q&A
Some of the questions posed to the participants focused on the following questions:
- How does the current crisis impact real estate markets in the US?
- How are US Residential and Office markets holding up?
- Which assets are the safest?
- Which assets are the worst?
In general, the participants provide a very somber outlook for the state of US real estate market in the near term, given significant uncertainties surrounding the Covid-19 pandemic. As expected, the office outlook was quite negative, especially the retail. However, within this sector, industrial, storage, and data were viewed quite positively with rents and prices holding up nicely. In residential, the Build to Rent (BTR) was signaled out as performing well in the months of March and April with rent payments over 90% in some cases; obviously, May and June will be important to watch. One of the participants said that LA residential housing prices were down about 15-20%, but he was seeing strong interest from affluent buyers seeking value in the higher end luxury market. Surprisingly, some of the participants were constructive on the outlook for the high-end hospitality space and believed that this space could benefit from social distancing.