On April 7, 2020, REjournals hosted a webinar featuring renowned real estate economist, Dr. Mark Dotzour. An astonishing number of CRE professionals tuned in—nearly 4,000—to hear Dr. Dotzour’s insights on the impact that COVID-19 will have on the economy and the real estate industry.
What does this COVID-19 economic situation resemble?
According to Dr. Dotzour, the current situation resembles a combination of 9/11, the 2008 housing crash and World War II. This event is like 9/11 in that it came out of nowhere and there is a general fear of the unknown. However, unlike 9/11, this catastrophe is occurring in every city on earth right now.
The 2008 recession had financial tremors and just last week, financial markets were shaking strongly. The Federal Reserve has tools to deploy right now. Just as during WWII, we need to mobilize the country, such as to procure and distribute medical supplies.
What will the recovery look like?
We were within two years of a recession before COVID-19 and some companies were struggling. With the onset of this, some companies are using this as basis to cut jobs. Dr. Dotzour anticipates a slow, jobless recovery. Segments that will particularly face challenges include the hotel, tourism, movie theater, oil and gas industries.
Will the CARES ACT stimulus bill be enough?
The whole creation is groaning. Four sectors are under incredible duress.
In the medical sector, supplies are in short supply and medical workers are under stress; the housing sector is groaning as people lose jobs; the financial sector is struggling even more than in 2008 and the supply chain faces pressure as shipping companies have low ship loads while factory workers are at work under stress.
The current GDP stands at $21.4 trillion. The federal government is trying to plug a hole with the stimulus. For 90 days (one quarter), this breaks down to about $5.35 trillion. The stimulus budget of $2.3 trillion won’t be fully sufficient for a full recovery. Dr. Dotzour expects that the national debt will greatly increase in 2020.
Investors should target three main investment vehicles: Stocks, bonds and real estate
The Stock Market decreased 36 percent in the past six weeks. “Did anybody’s real estate building drop 36 percent in the last six weeks? I doubt it,” Dotzour said.
Between December 31 and March 9, the Bond Market dropped to barely above 0.5 percent. Nine days later, the 10-year treasury spiked from 0.54 percent to 1.8 percent. This caused stress, especially with non-bank entities. Currently at 0.62 percent, showing that there is enormous volatility right now.
This pandemic will be just like past stock market crashes in that it will make real estate investment more attractive. The only difference is yields will be lower.
In 2008, the Federal Reserve cut the federal fund rate. Through quantitative easing, the Fed lowered interest rates and allowed people to refinance in 2008 to help the economic recovery. Dr. Dotzour anticipates the Fed will again lower rates and allow people to refinance again at even lower rates. He believes this will be the key for economic recovery.
What will happen to cap rates?
Dr. Dotzour predicts that cap rates are likely to remain low. The key will be to maintain low leverage. In the end, he remains bullish on real estate. The 10-year treasury has been falling for a long time and can’t get much lower.
Right now, there is downward pressure due to the 10-year treasury heading towards zero. The other component of cap rate is risk. Many buildings have significantly higher perceived risk right now which could push cap rates up. Conversely, strong tenants and property types may push cap rates lower.
When we get out of the stay-at-home policies, people will be ready to get out and start buying. Especially as mortgage rates remain low.
Long-term real estate demand
There will be a lot more industrial warehouse space built in U.S., especially with just-in-time inventory supply challenges caused by having so much dependence on China. There will be more demand in the U.S. as more inventory increases.
There will be more positive demand for agricultural farmland. Unimproved land in a runaway inflation scenario is a great investment. Class B and C apartments will see a lot of demand, as will RV Parks. Dr. Dotzour was less excited about Class A apartments.
According to Dr. Dotzour, suburban markets will see increased demand and urban demand will fall. People will have increased appetite to live in smaller towns near urban areas with people seeing benefits of teleworking and not being trapped in small urban confines.
What are the expectations of the office market over the next few years?
Office market has been struggling. The high cost of tenant improvements has not helped. Dr. Dotzour anticipates seeing an increasing trend in remote working. Could see long-term changes in office needs.
Are we going to see runaway inflation?
Printing money by itself does not increase inflation. Price increases, due to limited supplies, causes inflation. Some items will see big increases and there will be shortages such as face masks or other short-term supply chain shortages. Some items will see short-term inflation.
Is there a potential corporate debt bubble coming as another punch after COVID-19?
There are several potential risks right now. The government is doing the best they can, but they don’t know if it will work. Oil-driven markets are going to face real pain in areas such as Texas, Oklahoma and North Dakota.
Are we looking at another massive infrastructure bill from Congress?
It’s possible. It’s stunning the political will of federal government right now to drive deeper into debt. We could see stimulus packages exceeding $5 trillion given the current events. Japan’s debt is over 200 percent of GDP and they are still doing fine. U.S. debt is just over 100 percent.
About the author
Mitchell Simonson, MAI has been in commercial real estate for 16 years and founded Simonson Appraisals on January 1, 2019. Mr. Simonson enjoys writing about and discussing commercial real estate, personal development and business.