COVID-19: Research Update VIII


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 16th, 2020

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

Do we have a better sense today of what the economic recovery will look like?

The Coronavirus-driven recession is over, at least according to Moody’s. At first glance, this statement is difficult to square when considering jobless claims topped 1.5 million in the week ending June 6th, remaining twice as high as any other time before the pandemic. Yet, technically Moody’s may be right.  The reopening of state economies in June (every state has begun reopening to some extent) and the subsequent uptick in economic activity appears to have ended the downturn caused by COVID-19. Regarding the recovery, there is a growing consensus that it will be gradual, rather than V-shaped. The Federal Reserve (Fed) released their economic forecasts last week, and it indicates GDP in 2020 will slide to -6.5%, the lowest annual output since 1946. The expectation is that GDP will take two years to recover, approaching 3.5% in 2022. Similarly, the unemployment rate, at 13.3% as of May, is expected to fall slowly to 9.3% by the end of the year, more than double the pre-crisis level. While we agree with the Fed’s assessment that recovery will be gradual, we also expect some industries to bounce back much faster than others, leading to an uneven recovery in the economy and commercial real estate market.

Is deflation still a risk in the near term?

In a recent press conference, Fed Chair Powell indicated that the central bank believes the economy will take years before it reaches the Fed’s 2% inflation target.  Yet, concerns over deflation have lingered since the onset of this pandemic given the demand destruction caused by the lock-down restrictions, and recent inflation data has validated this fear.  The Consumer Price Index decreased by 0.1% in May. This decline marked the first time that the index recorded three consecutive months of negative inflation growth since the government began tracking this information in 1957. The damage has largely been isolated to a few industries (e.g., hotel prices, airfares, and apparel prices). One would expect pricing to begin to recover once consumers resume somewhat regular spending habits as state economies continue to reopen. But again, the recovery will be uneven, for example, the rebound in hotel occupancies have outpaced airlines sales.

Are we starting to see evidence of a second wave of infections?

The data seems to indicate that the U.S. is not experiencing a second wave, but rather it has yet to get through the first wave of infections.  Since peaking at approximately 36,000 average new daily cases on April 10, the number of new daily cases slid to around 22,000 on average by mid-May and has remained near that same level for the last four weeks.[1] One would expect the total number of documented cases to rise as testing has become more widely available. However, the surging hospitalization rates in various regions of the country (including Texas, Arizona, and California) are an indication that the virus is far from contained. There was hope that the warmer summer months would help curb infections, but thus far, that has not proven to be the case.  In the weeks ahead, hospitalization rates will garner more attention because the possibility of overwhelming hospital systems with sick Coronavirus patients was one of the main reasons officials initially implemented shelter-in-place restrictions back in March. Suffice to say, a resurgence in infections remains a critical downside risk for the economic recovery and real estate markets.

How might lower interest rates and a weaker dollar affect commercial real estate?

Expensive hedging cost and a relatively strong dollar have proven to be a headwind for foreign capital flowing into U.S. real estate markets in recent years, but those conditions appear to be evolving. The Fed cut short-term rates to near zero in March, but rates were already declining and have fallen a total of 225 basis points since mid-2019.  Meanwhile, many other central banks have not cut rates during the pandemic, mainly because they were already near their lower bounds when the crisis began. Thus, the interest rate differential between the U.S. and other countries has moved sharply lower, subsequently reducing hedging costs for many foreign investors. At the same time, the U.S. trade-weighted dollar has steadily weakened since March, partly because the record amounts of fiscal/monetary stimulus required to support the U.S. economy have led to a widening budget deficit. The combination of lower hedging costs and a weaker dollar could attract cross-border capital into the U.S. commercial real estate market, particularly as the recovery takes hold, given America has traditionally been the first advanced economy to emerge from a global recession. 

Notable Real Estate Updates

Multifamily: Several state and local jurisdictions have placed a moratorium on evictions in response to the pandemic, but the city of San Franciso passed legislation last week that permanently bars landlords from evicting tenants for not paying rent due to Coronavirus-related issues. The law does not waive unpaid rent, but rather forbids landlords from ever using the missed rent as a reason for eviction.  Advocates of the bill view it as protection against displacing tenants during the pandemic.  Still, some property owners have voiced concern regarding their ability to cover expenses (i.e., property taxes, utilities, insurance, and repairs) should their tenants be unable or unwilling to pay rent. Fortunately, multifamily rent collections have been stronger than initially anticipated at the onset of the crisis (averaging almost 95% in both April and May), according to NMHC.  However, if the Coronavirus slows the reopening of state economies, this legislation may set an unsettling precedence for other jurisdictions across the country.


Despite the challenging economic conditions, the recent jobs report delivered a welcomed surprise to the upside.  The U.S. added 2.5 million nonfarm jobs in May, straying far from the consensus expectation of a 7.5 million decline. Indeed, various complex factors led to economists missing the monthly estimate by 10 million jobs.  However, the situation is also a stark reminder that we are in unchartered territory from an economic standpoint, and there will be times during this recovery where historical models and conventional thinking may prove inadequate. Therefore, as prudent commercial real estate investors, we are continually evaluating market conditions, focusing on what we believe to be sustainable trends (e.g., demographics, onshoring, and e-commerce) that have either been accelerated or reinforced as a result of the COVID-19 pandemic.

[1] Johns Hopkins Coronavirus Resource Center


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