Well, now we know.
Speculation on when the long bull market, economic expansion and real estate boom would come to an end has been answered. While the official statistics lag behind reality, it is hard to imagine that we have not entered R20 – Recession 2020. The COVID accentuated slowdown will impact the real estate market and industry in the short term and perhaps the long term, on both the demand and supply side of the market. Today we give some thought to the short-term implications of our current situation. R20 attacks national prosperity with two thrusts. The first, and unique in living memory, is that is disrupts how we go about our lives, significantly impairing mobility and limiting our ability to get stuff done and earn money. The second, more commonplace, thrust is that it tips the economy into recession, likely lasting after the quarantine and social isolation fade.
Demand side: Wow, that was fast. All of a sudden unemployment claims are up, businesses are closed, and people are working from home. The most basic measure of the economy is Gross Domestic Product – the production of goods and services. With businesses closing, even if temporarily, and people telecommuting, output, and hence income, is down. With lower income, there is less ability and willingness to spend money. Hence, we should expect to see slackening demand for housing and a softening in willingness to pay rents. Expect apartments to lower rents to fill units, either by literally lowering the rent or by offing gift cards, free months, or some other inducement. Similarly, there should be less demand for owner-occupied housing in the coming months, and less ability for sellers overall to price aggressively. Commercial real estate will suffer parallel indignities. Companies are doing what they can to survive, and are generally not looking to take on more space, except perhaps for food delivery services. Company failures will outpace company births, on net giving space back to the market.
Supply side: In a typical recession, it gets easier to build. Lines at the permit counter shorten, banks become eager to talk, workers hunger for projects and get aggressive on pricing, and materials are easy to come by. Some of these factors hold in R20, but others run counter to experience. Municipal permit counters are closed in many places, or have gone virtual, which will delay the basic machinery of accepting, reviewing and issuing permits. For projects that require some sort of permission from a zoning board, a historical board or other type of review board comprised of members of the public, these things are on hold or significantly delayed. Meeting with bankers to get loans, or with architects to review plans, or contractors to figure out how to build is more difficult in a virtual world than in the real world. Thus, the ability to move projects forward, irrespective of demand, is impaired compared to what it would normally be in a slowdown. Expect projects to be delayed or cancelled, and a significant decrease in newly proposed projects as a result.
Of course, there are plenty of variables at play. How long and how deep will the isolation last? What kind of stimulus will the Feds offer, and how well will it work? How spooked by the economic turmoil with the consuming populace be? How bad will the recession be? And, what will be the longer-term implications of the current recession. Stay tuned next week for real estate in 2021 and beyond.
Dr. Peter Angelides is a principal of Econsult Solutions, Inc. (ESI), senior economic advisor and corporate director of ESI ThoughtLab, and a member of the teaching faculty at the University of Pennsylvania. Dr. Angelides has high-level expertise in both economics and city planning, applying critical economic thinking to projects in real estate, economic development, transportation, tax policy, valuation and litigation.