COVID-19: Research Update VII


Will McIntosh, Ph.D
Global Head of Research

John Kirk, CAIA, CCIM
Senior Director, Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

Karen Martinus
Senior Associate, Research

Chenchao Zang
Senior Associate, Research

Jane Zheng
Associate, Research

June 1st, 2020

Here are our thoughts on the economy and financial markets as we reflect on the pandemic and its fallout:

When will the labor market recover?

Weekly jobless claims have fallen for eight consecutive weeks since peaking at nearly 6.9 million in late March, but it will likely take several years before the labor market fully recovers. Initial claims for unemployment benefits topped 2.1 million in the week ended May 23, bringing the 10-week total to nearly 41 million. Despite the steady decline in the number of filings over the last two months, weekly claims remain three times higher than at any point in history before the Coronavirus crisis. Notably, it took six years for the unemployment rate to normalize in the 5-6% range after peaking at 10% during the Global Financial Crisis (GFC). The labor market recovery for this recession could last even longer when considering that the unemployment rate is forecast to double that of the prior crisis, landing somewhere between 20-25% by the end of the second quarter. Yet, the unique nature of this crisis, requiring businesses to shut down in the interest of public safety, makes it difficult to know for sure if this recovery will resemble that of previous recessions.

If economic conditions are so dire, why is the stock market rallying?

There is certainly a disconnect between stock market performance and real economic conditions.  The S&P 500, for example, is up nearly 36% from its March 23rd lows. Recent news regarding the possible delivery of a vaccine by the end of the year has given investors hope for a quick recovery. Still, the seemingly unlimited amount of government liquidity is likely the primary reason for the stock market’s recent surge. Barring a second wave of the virus, aggressive monetary and fiscal stimulus could keep the stock market afloat until economic activity catches up. Despite Oxford Economics’ recent warning that equities are 16% overvalued and due for a correction, the stock market could approach pre-crisis levels in the second quarter at its current pace. At the same time, the U.S. economy will probably experience the worst quarterly GDP contraction in the post-World War II era (-50% according to Moody’s) and the highest unemployment rate since the Great Depression. Only time will tell if the stock market can continue to decouple from the broader economy.

Is there any good news on the economic front?

The federal stimulus is having a positive impact on consumer balance sheets.  In the most recent personal income report, federal transfer receipts – payments that capture efforts by the government to redistribute money to those in need – surged nearly 90% from $3.3 trillion in March to $6.3 trillion in April. This increase marked the most substantial monthly growth on record, well above the 31% increase in transfer receipts that occurred during the GFC. Unemployment insurance benefits have been a pivotal contributor to the recent rise in government transfers. The CARES Act expanded eligibility for benefits while adding $600 to weekly checks for applicants. According to a study from the University of Chicago, approximately 68% of jobless workers are bringing home more money from state and federal unemployment benefits than they would have received at their previous jobs.[1]  Moreover, these benefits have almost certainly helped multifamily rent collections to exceed expectations in both April and May.

What are the interest rate and inflation expectations given the current economic backdrop?

The Federal Reserve’s (Fed) balance sheet continues to balloon. It soared past $7 trillion in recent weeks – up almost 70% (or $2.9 trillion) since early January – resulting from efforts to support capital markets and manage interest rates. Interest rates remain near historic lows with the 10-year Treasury yield hovering around 0.65% last week. The 2-year Treasury bond yield fell to .13% in early May for the first time on record, reigniting concerns that rates could dip below zero in the near term as U.S. Treasuries have become a haven for global investors. However, the Fed remains steadfast against using negative rates as a policy instrument. Instead, they have focused on identifying tools that will help sustain low interest rates during an eventual recovery. Federal Reserve Bank of New York President John Williams recently said that policymakers are “thinking very hard” about implementing yield-curve control. This tool would allow the central bank to ensure that borrowing costs remain low, though it could also require unlimited bond purchases from the Fed.  Yield curve control has been used by Japan for years to stimulate economic activity and was recently adopted in Australia as well. From an investment perspective, the discussion regarding yield curve control is an indication that the Fed is planning to keep rates low for a prolonged period, potentially allowing inflation to run above trend during the recovery. Such a dynamic makes commercial real estate an attractive investment, given its ability to provide an effective inflation hedge.

What is the impact of the recent escalation between the U.S. and China?

The geopolitical risk adds another layer of uncertainty at a time when investment conditions are already challenging, but a lot is at stake.  Politically, both leaders are looking to appeal to their citizens as a bid to retain power is on the horizon. President Trump faces an election in November, and Chinese President Xi Jinping will undergo a leadership contest as well during the Communist Party conclave in 2022. While neither party appears interested in deescalating the situation, a military conflict seems unlikely despite the heightened rhetoric. From a financial standpoint, however, it could be challenging for the global economy. China’s first-quarter GDP grew at its slowest pace in 28 years, while the U.S. faces possibly one of the worst GDP declines in history during the second quarter, as noted earlier. Furthermore, the phase-one agreement, which was nearly three years in the making and the first meaningful step in restructuring trade relations between the two countries, could now be in jeopardy. Ultimately, with the two largest economies in the world struggling to gain traction while also waging a geopolitical battle against one another, at the very least, this situation will serve as a headwind to the global economy’s recovery from COVID-19.

Notable Real Estate Updates

  • Multifamily: The National Multifamily Housing Council’s (NMHC) Rent Payment Tracker indicated that through May 27, rent collections for the more than 11 million apartments surveyed were down just 1.5% compared to a year ago. Rent collections have generally been more robust than many investors feared, given the size of recent job cuts. While the NMHC tracker does not delineate by property quality, anecdotal evidence suggests that Class A rent collections have been even stronger than the broader market. Still, there are signs that tenants’ finances are becoming overleveraged. Zego, a payment-processing firm, reported that the use of credit cards to pay rent climbed 30% in April compared to March and had risen another 20% by mid-May. In the near term, rental demand could dip as potential renters are not only concerned about their economic livelihood, but social-distancing requirements will limit foot traffic as well. However, the gradual reopening of state economies combined with the ongoing jobless benefits should help stabilize rent collections as employees begin to return to work.
  • Student Housing: Only 65% of students would return to campus if colleges were to reopen for the Fall 2020 semester without a coronavirus vaccine or cure, according to a recent poll from College Reaction. This study is consistent with a report from American Campus Communities that indicates preleasing for the upcoming fall semester is down 40% from normal levels. As the health crisis unfolds, colleges and universities will undoubtedly feel the financial sting of having to shutter for months. However, once the virus is contained, these institutions will still have to compete for students, and a modern student housing inventory centered around health and safety will be vital in the battle for higher enrollment.


It is difficult to say how long the economic fallout from this shock will last. One could argue that the downturn was not a result of excessive imbalances in the financial system, and a speedy recovery should occur once the virus is contained. Yet, other imbalances have emerged, such as record federal debt/deficit levels, a heavy reliance on central bank liquidity, and a profound number of unemployed in the labor market – all of which could take years to sort out. The eventual recovery from this pandemic will almost certainly be uneven, with some parts of the economy recovering to a pre-crisis level almost immediately (V-shaped) once the virus is contained. At the same time, other segments will languish for years to come. Thus, the commercial real estate recovery will likely follow a similar path, with a rapid improvement in industrial and multifamily followed by a more challenging road for lodging and retail.


[1] Ganong, Noel, and Vavra, The Unemployment Insurance Calculator, Becker Friedman Institute for Economics at the University of Chicago.



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