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COVID-19 Impacts Will Be Felt for Years

Recently, Kevin Thorpe, chief economist with commercial brokerage firm Cushman & Wakefield, offered his thoughts and insights on the impacts of the coronavirus on the U.S. and world economies and the real estate market.


In total, Thorpe’s forecast was a mixed bag, with a rather sobering review of COVID-19’s impact on the economy and a realistic outlook of how long it will take for the real estate markets and the economy to return to post pandemic levels.


“This is the most severe global recession in the Post WWII era,” Thorpe said. “Second quarter GDP estimates are starting to roll in. In the U.S., real GDP collapsed by an annualized rate of 33% in Q2—the largest one quarter drop on record. In terms of lost economic output, the COVID-19 recession has already more than doubled what we observed during the Great Financial Crisis. Employers in the U.S. cut 22 million jobs in the months of March and April. As of July, they had only brought nine million of those jobs back.”


He added that the coronavirus has also hit Europe hard. Eurozone real GDP is expected to have dropped 40% in the second quarter. Job losses have been less severe across Europe, at least so far, due largely to various furlough schemes and wage subsidy programs.

Asia Pacific is more of a mixed bag. Where the virus was largely contained in the second quarter, those economies began to rebound as was the case with Mainland China. But the bulk of the rest of Asia Pacific region fell into a deep recession in the second quarter on par with what took place in the U.S. and Europe. For example, in Australia, Singapore, Japan, and India, real GDP is expected to decline by an estimated 30%-40%.


Thorpe believes that the second quarter will be the trough for most economies, including the U.S.


“Pick your economic data series and you will likely find an upturn that started in May—retail sales, road traffic, restaurant bookings, mortgage applications, oil consumption—have all shown at least a partial rebound from the low levels we observed earlier in the year,” Thorpe said. “That said, it is also clear that as economies have opened, the virus has spread. Nevertheless, given that the bulk of the economic data is quite clearly improving, and given that national lockdowns are unlikely (at least to the degree that we observed earlier in the year), most economists assume the worst of the recession is behind us.”


Other key points from Thorpe’s briefing include that economic growth is expected to be subpar until the coronavirus crisis is resolved. He noted that the U.S. real GDP will not return to pre-crisis levels until mid-2022 and in Europe its real GDP will not ratchet up to pre-recession levels until the end of 2022.


One of the bright spots during the pandemic has been eCommerce. Online sales accounted for 16% of total U.S. retail sales in 2019, a figure that jumped to more than 20% during the COVID-19 lockdown period and has remained elevated since then.


“We also know that this acceleration in online sales is boosting demand for industrial logistics space, which has already nearly returned to pre-crisis levels of absorption,” Thorpe said. “And occupancy rates for these kinds of facilities hovered at approximately 95% in the U.S. in the second quarter.”


Other types of real estate that are either already benefiting or will likely benefit from secular shifts and accelerating trends include data centers, Internet-related real estate, life sciences and real estate in the suburbs.


He added that although the apartment sector faces significant near-term headwinds (e.g., job losses will undoubtedly impact the fundamentals), this sector also has long-term strength. In the U.S., nearly half of the millennial generation are still in their 20s—prime renting ages—and Generation Z is coming up right behind them. By some estimates, Gen Z is even larger than the millennial cohort. Empty nesters will also be an important source of demand, he predicted.


In terms of the office market, Thorpe said it will also fully recover, but it will take longer, noting that it faces more challenges. The sector is currently facing the cyclical impact of a sharp recession that leads to demand decline that will result in full employment levels not being achieved for several years. Where the COVID crisis differs from other downturns, the office sector also faces structural impacts being accelerated by the virus.


“Most surveys indicate a larger share of office workers will permanently work from home. Similarly, we’ll see a larger agile worker population—people who work remotely at least some of the time,” he said. “For some businesses, those new dynamics are likely to change the mix of space they lease in the central business district versus the suburbs.”


“Expect a slow, uneven economic recovery, and by extension a slow, uneven recovery for property. When the pandemic is finally in the rearview mirror, expect a lot of movement that spurs transactions,” Thorpe added. “The pandemic has undoubtedly launched a flurry of new real estate strategies. Some businesses will rethink their office footprint, some will want more space in the suburbs and less downtown. Some investors will reweigh their portfolios, maybe go heavier on industrial, lighter on office. Regardless, the new economy will need new things, so whether we see converted or reimagined malls, hotels, movie theaters, obsolete office buildings, fitness centers or more, real estate investors and users will find opportunity to reinvent real estate.”


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