From a small northwestern observatory…

The stock market revived quite nicely this month, with the Dow up about 12.5% in the first 11 trading days, although I’ll admit that real estate in general (and ACCRE, our in-house fund) had a couple of tough weeks. Why, you ask? I’m getting to that.

Now for the tough news. Fed Chair Jerome Powell today, speaking at the European Central Bank Forum, noted that “We’re covering, but to a different economy.” In short, the economy as we knew it is probably a “thing of the past.” We’ve suspected this for some time. In many ways, both macro and micro, the economy has shifted out from under us. Some examples, taken just from my personal experience, in no particular order…

1. Technology has taken the place of in-person meetings. I probably attend more meetings per week now than I did a year ago, but they’re all on zoom or such. I have three scheduled for today, and that’s not unusual. The good news — my travel time, finding a parking space, calling for an Uber, etc., are way down. The bad news — the folks who drive those Ubers, the servers and cleaning staff who work in conference centers, the folks at Starbucks who get me my coffee for the drive, indeed the guy at Brooks Brothers who sells me neck-ties, are all out of work.
2. Lack of in-person means dramatically less demand for hotel space. In an average month pre-Covid, I’d take two business trips with anywhere from 2 to 5 nights in a hotel. Now? None of the above. No need for office space, hotel meeting rooms, airplanes, etc.
3. Ditto restaurants. I can’t remember the last time I darkened the door of a sit-down establishment.

The lowest paid workers, those in jobs requiring face-to-face contact, are shouldering most of this burden. The recovery, such as it is, can be decidedly described as “K” shaped, with some parts of the economy (those heavily invested in the stock market) doing very well, while others are running out of oxygen.

Not to belabor the point but this all has some very real implications for real estate. If Mr. Powell is correct — and I believe he is — then the tough sledding we’ve seen thus far in the property market is bound to get worse in 2021. The S&P property index, measured in terms of total return, is down 7% for 2020. Now, given how well it’s performed over the past 10 years, that’s not a bad pull-back. However, Mr. Powell suggests we may see ourselves oversupplied with property next year, particularly in categories where workers meet customers on a face-to-face basis. While the market has already discounted a lot of this, such as in REIT prices, the workout problems will be immense.

As always, I enjoy hearing from you. Please reach out if you have any comments or questions.

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com