We all love a good prediction. I figured I’d dust off the ol’ crystal ball and let everyone know exactly how this whole thing plays out.
Hopefully, you detected my sarcasm there.
It can be valid and important to think about the future and what might happen, and making predictions is part of that. But predictions are a tool to get you thinking and formulating a strategy. The point is not to get it exactly right.
The key is to develop and maintain a good investment process. Making predictions is a way to help see the big picture and ensure your process incorporates critical potential future events.
I don’t pretend to know exactly what will happen in the wake of COVID-19. In times like this, predictions are even tougher than normal given all the moving parts. So don’t take this as gospel but as an exercise to think critically about the economy and real estate.
The Only Thing That’s Certain
The first point I want to touch on is the long-term nature of the changes that are taking place in the economy. The end of 2020 is eight short months away. The ramifications of the coronavirus and the response from individuals and governments will have much longer impacts on the economy.
Recently I wrote “4 Ways Coronavirus Is Rapidly Changing the Economy (& How to Navigate Rough Waters Ahead).” Check out that piece for some of the longer-term themes that go beyond 2020.
Those ideas include a couple years (maybe more) of deflation or extremely low inflation, followed by a massive spike in inflation. I think we’ll also see massive geopolitical shifts and an economy where intervention from the Federal Reserve and federal government becomes more and more commonplace.
Here I’ll try to focus on the more immediate term.
The Next Few Months
We’ve now hit 30 million unemployment claims filed since the beginning of this mess. That’s about 18% of the labor force. While we see more of the country opening up and varying degrees of restrictions being lifted, I’m highly skeptical of the idea that 2020 will see a very sharp recovery.
Granted, second quarter GDP will likely plunge by such a great amount that a recovery in Q3/Q4 will look like a good spike. But I think when the dust settles for 2020 we’ll look back on it as a very challenging year.
Restaurants, for example, are already a category that is extremely prone to failure as it is.
Now the ones that open will face some hesitant customers and new policies and restrictions. If they’ve got razor-thin margins as is, what happens if they have to space their tables out more and can only accommodate 60-70% of the customers they were serving pre-pandemic?
Yes, some people will start to fly. Some even enthusiastically, given the deals that will be available.
But will volumes return to pre-virus levels quickly? Will there be a good chunk of people who don’t like the idea of being crammed in with strangers and breathing recirculated air?
How about all the other retailers that have lost business? And then their landlords.
Even the businesses that weren’t directly impacted have to worry about fewer clients, fewer customers, fewer business relationships. Among those that weren’t laying people off, will they look to expand and hire at the same rate immediately?
For these reasons, I have a hard time seeing 2020 ending on strong footing. It is certainly possible that we build some momentum toward the end of the year, but I think we should prepare for a bumpy ride.
What Will the Housing Market Look Like After the Coronavirus Pandemic?
2020 is looking to be a transitional year in real estate. Most of the layoffs in the restaurant and hospitality space have had a particularly strong impact on jobs typically held by renters. At the same time, hundreds of thousands of new apartment units are scheduled to be delivered over the next several quarters.
Given the programs put in place to defer rent payments and mortgages and the ongoing flurry of bailouts and monetary assistance, it’s tough to know exactly what will happen in the rental market. So far, we are seeing most renters continue to make payments, but skips are increasing and traffic to properties is still down, though recovering.
This year will be slow for residential rentals, as well. We’re starting to see renters already beginning to shift their preferences. Inquiries on 2- and 3-bedroom units are up, suggesting people are looking for roommates instead of finding their own 1-bedroom.
Renters may continue to look for better value, lower rent, and proximity to employment while shifting away from wanting the nicest units with the best amenities.
That said, at the institutional level, we are still seeing a high level of demand for residential real estate. I believe this is due to the large amount of capital in the market looking for a home, as well as the friendly lending environment from Fannie and Freddie.
With the amount of money the Federal Reserve has injected into the system, there is going to be continued demand for apartment investments and a flight to quality in terms of markets, locations, and asset classes.
I do think that toward the end of the year and into 2021, there may be some interesting buying opportunities, as well. There have been a lot of investors and sponsors buying real estate and banking on really strong rent growth and value-add premiums to enhance the value of their properties.
In this climate, that may not materialize.
When it is time to refinance, they may find less willing lenders and be forced to make a deal. Time will tell on that front.
Ultimately, I see the 2020 economy as being rocky overall, but recovery from the deepest decline will begin to take hold. I think we’ll observe transitions in how renters behave, how work is done, and how businesses attract customers.
Further down the road, we’ll start to experience the consequences of more bailouts and money creation.
‘Residential real estate is a good place to be right now. People will always need a place to live, and capital markets for apartments remain strong.
The best advice I can give everyone is to stay calm, stay in the markets, look for opportunities, and be courageous enough to act when the time is right.
Good luck out there!
What are your predictions for 2020’s economy and beyond?