COVID-19: Research Update III
Will McIntosh, Ph.D
Global Head of Research
John Kirk, CAIA, CCIM
Senior Director, Research
Mark Fitzgerald, CFA, CAIA
Executive Director, Research
Senior Associate, Research
Senior Associate, Research
We continue to monitor the economic conditions resulting from COVID-19, with the following questions top of mind:
What are the expectations for the global economy in 2020?
The International Monetary Fund (IMF) sharply downgraded its 2020 outlook for the global economy last week, forecasting a contraction of 3% in 2020. This forecast may prove ominous for global corporate earnings. During the GFC, in which global GDP fell just 0.1%, pre-tax earnings of global non-financial corporations slid by 45%. If the IMF’s assessment of -3% GDP is accurate, corporate earnings for non-financial companies will likely fall significantly further than they did during the GFC.
Have U.S. labor conditions begun to stabilize?
The recent employment data would suggest that labor conditions have a long way to go before stabilizing. The number of people filing for unemployment benefits topped 5.5 million for the week ended April 11th, totaling 22 million claims over the past four weeks, eclipsing the total number of jobs created over the last decade. Many expected the pandemic would disproportionately impact some industries (e.g., restaurants, malls, hotels, and other service businesses). On the other hand, higher-skilled jobs seemed more secure, mainly because they typically have minimal personal contact with consumers. Yet, Oxford Economics projects that April's jobs report will show cuts to 3.4 million business-services workers – such as architects, advertising professionals, lawyers, and consultants. Additionally, 1.5 million nonessential health-care workers and 100,000 information workers (media and telecommunications) will have joined the ranks of the unemployed. We expect more high-skilled workers will be affected as the economic shut down progresses.
What did we learn from the recent retail sales data?
Retail sales were down substantially in March as one might expect given widespread store closures, but the uptick in both traditional and online grocery sales is worth monitoring. Total retail sales fell 8.7% in March from the previous month – it was the most significant decline since 1992 when the Census began tracking this data. Concerning grocery stores, their sales were up nearly 27% from February and 29% year-over-year. Before the pandemic, e-commerce accounted for about 4% of U.S. grocery sales. That number is estimated to be well above 10% of all grocery sales today, creating a new high-water mark for the industry. It is not clear if consumers will revert to pre-pandemic shopping habits. Still, this trend is worth monitoring because it could have far-reaching ramifications for the grocery industry, and grocery-anchored real estate in particular.
When will the stimulus checks arrive?
As part of the CARES Act, the government earmarked $292 billion to be sent directly to consumers. The week of April 13th saw the first deposits (of up to $1,200 per person) in many bank accounts, as the IRS began distributing economic stimulus payments to some 60 million Americans. However, it might take up to five months, possibly into the third quarter of 2020, before the payments arrive in the mailboxes of the nearly 100 million people who must be paid by check. In theory, providing stimulus checks directly to consumers seems reasonable. However, given that many Americans still rely on old-fashioned snail mail rather than direct deposit, much of the stimulus will not reach households until after the first months of the crisis have passed.
What is the status of the Paycheck Protection Program?
As Len mentioned in his previous update, the administrative issues that slowed the initial application process for the Paycheck Protection Program have mostly been resolved. In fact, as of late last week, the loan program targeting small businesses had been fully committed. The Small Business Association reported last Thursday morning that 1.6 million applications had been received and $339 billion approved, and requests were no longer being processed. With roughly 70% of the nation’s 30 million small businesses applying for emergency assistance, the program is in dire need of new funding. Meanwhile, Congress continues to quarrel over legislation for additional funding for small businesses, according to recent reports.
Is the economy going to reopen in May?
Last week, state officials debated with the federal government over reopening the economy, possibly in May. States on both coasts formed coalitions and formulated plans to revive their respective economies, even as President Trump, at one point, seemed to be maintaining that this authority was his alone. Indeed, it is productive for officials to discuss the path to safely opening the economy. Still, even after stay-at-home orders have been lifted, much of the discretion will fall to business leaders. We expect larger companies to help set standards for reopening their firms. For example, Facebook’s official announcement on April 16th may serve as a guide for other corporate tenants:
- Employees will continue work-from-home through the end of May 2020, except for critical employees who cannot work remotely.
- If employees feel they cannot work in the office – because they are in a vulnerable population, because they do not have childcare, or any other reason – employees can plan to work from home through at least the summer.
- Business travel will be prohibited through at least the month of June, if not longer.
- All of the company's large public events (50 people or more) are canceled until June 2021, with the expectation that a vaccine will be available at that time.
Indeed, the criteria to return to work will vary by industry. But this outline suggests that a reopening of the economy will occur gradually, over several months, to minimize future outbreaks and ensure workers are safe.
Are there further risks to the economic outlook?
The following highlights three key risks that loom over both the U.S. and global economy:
- A second wave of Coronavirus is undoubtedly possible. Some countries in Asia-Pacific are experiencing a second wave right now (e.g., Hong Kong, Taiwan, Singapore, and others). From a historical standpoint, this is not unusual. Three waves occurred during the 1918 Spanish flu. A second wave could further extend the closure of nonessential businesses, social distancing, and shelter-in-place orders.
- The global banking system is healthier today than it was during the GFC, but loan losses from this downturn could be many times larger than they were a decade ago. Banks could experience substantial defaults across multiple profit centers. Central banks have proven they are willing to provide liquidity to the financial system, but the magnitude of the potential loan losses may render some banks insolvent.
- The ability of asset managers (across various asset classes) to cover fund redemptions during market volatility without resorting to distressed sales could soon be tested, given that some of them are highly leveraged while having low cash reserves. As Len noted in his previous letter, CRE sellers are “hanging on.” But, fire sales could emerge in a protracted economic shutdown, especially if a second wave of the Coronavirus takes hold.
Notable Real Estate Update
Multifamily: Only 84% of tenants paid any of their rent between April 1 and 12 of this year, compared with 91% in April 2019, according to data released by the National Multifamily Housing Council. If legislation recently proposed in San Francisco passes, local landlords would have no recourse to eviction for unpaid rent while the city’s pandemic moratorium is in place (currently scheduled to expire June 22 unless extended by the mayor). Under the existing moratorium, residents have up to six months to pay any back-rent owed. If that debt is not paid within the half-year period, landlords could potentially proceed with eviction because of nonpayment. San Francisco city officials are considering legislation that would make the temporary ban on evictions permanent, ensuring that tenants would never be evicted due to unpaid rent incurred during the Coronavirus pandemic. The move would be the first of its kind in the country, potentially establishing an unsettling precedent for other municipalities to follow.
Single-Family Housing: Unlike the previous recession, single-family housing was not the catalyst this time, but it has still been deeply affected. In March, the NAHB reported the most significant month-on-month fall in homebuilder confidence since the survey began in 1985. Single-family housing starts dropped 17.5% over the same period, and the current forecast calls for just over 500,000 annualized single-family housing starts over the next couple of months, down drastically from its pre-pandemic level of 1.5 million housing starts. The industry took nearly a decade to recover from the GFC, and the pandemic may disrupt the single-family housing market for many years to come. When considering the possibility that 30% of the workforce could be unemployed in the coming weeks, the number of potential homebuyers has diminished significantly. Not only does being laid off prevent potential buyers from qualifying for a home loan, but the market volatility will likely scare away even those would-be buyers that still have a job. The mounting issues within the single-family housing market will likely lead to even more robust multifamily demand going forward.
Ultimately, we expect policy officials to continue to take aggressive measures to support the economy. A quote from Fed Chair Powell captured this sentiment during a recent interview in which he spoke about the Fed’s role during the crisis, “People are undertaking these sacrifices for the common good, we need to make them whole. They did not cause this.” Therefore, as weakness in the economy arises, we expect a decisive response from policy officials, which will likely come in the form of more stimulus. Certainly, economic conditions remain dire, but we are encouraged because it is now possible to see the pathway to economic recovery.
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