From a small northwestern observatory…

Finance and economics generally focused on real estate


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This week, I sat thru a great presentation (virtual, of course) by John Chang, the Director of Research at Marcus and Millichap. Like any research report, it has to be taken in the context of all of the other information out there. However, I get a deluge of this stuff, and I thought Chang’s work on the subject was quite good.

He starts out by noting what we all pretty much know — four real estate subsectors were hit the hardest this year: Hotels, Senior Housing, Sit-Down Restaurants, and Experiential Retail. Three sub-sectors actually did quite well: Industrial (and I would note data-centers in particular), Self-Storage, and “Necessity” retail. Later in his presentation, he points out that Offices and Housing (I would note with the exception of student housing) also held onto some core value.

Chang comments — and I concur — that never in our memories have we seen a real estate recession that was so geographically broad and across so many sub-sectors. For example, the 2008/10 debacle was primarily focused on housing and the mortgage backed securities market, and while the entire real estate securities market declined, it was more related to correlations with the broader market than with underlying real estate fundamentals. Today, however, we’re seeing some very real systemic changes throughout the real estate economy.

So, what does 2021 look like? The first half of the year is, at best, a continuation of where we are right now. Small businesses, and the real estate that supports those businesses, are hanging on by fingernails. Chang suggests that a recovery in the 2nd half of 2021 depends on three variables:

  1. The size and quality of the next recovery package. In his opinion — and I agree — the mid-sized package would be in the range of $1.5 Trillion, and would include expanded unemployment, PPP expansion for small businesses, housing assistance, assistance for state and local governments, public health assistance, and provisions for vaccine distribution. If the next stimulus package is smaller than this, then business and real estate in the U.S. will face considerable headwinds.
  2. “How long” will a medical solution require? If a medical solution can be rolled out by mid-2021, then a 2nd half recovery may be in the offing. However, time is not our friend, and there will be continued attrition until a solution is in place.
  3. “How effective” will a medical solution be? There will undoubtedly be setbacks. How well will we overcome the medical road blocks along the way?

If all of this come to fruition in a timely fashion, then a recovery may come along slowly in the 2nd half. The “down” sectors, particularly tourism related and in regular tourist destinations like Orlando and Las Vegas, may see a slow recovery start up by the end of 2021. Other down sectors may see some light at the end of the tunnel. Conversely, sectors which enjoyed the greatest benefit during Covid (data centers, for example) may lag the market. Offices and housing should continue to hold their own.

Again, I don’t necessarily agree with everything Mr. Chang said, but his opinions are some of the best I’ve seen, and I wanted to share this with you all. If you have any questions, please don’t hesitate to reach out.

John A. Kilpatrick, Ph.D. —

Written by johnkilpatrick

December 6, 2020 at 12:05 pm

Posted in Uncategorized

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