Published on Wednesday, January 13, 2021
Has the pandemic accelerated uncomfortable paradigm shifts where there is no turning back from changes in how we live and work?%>
It may feel good that 2020 is over, but the first part of 2021 promises more of the same with the Covid virus still out of control. “Normality”—defined as we don’t need to worry about getting sick from the virus and can go to a bar or get on a crowded subway without a mask-- remains months off and maybe not until year end. And then what? A sudden bounce-back to populated office buildings and vibrant crowds shopping in stores, booked hotels, and rising rents? Or has the pandemic accelerated uncomfortable paradigm shifts where there is no turning back from changes in how we live and work? Probably a mix of both.
Increased Debt and Poverty Over the past several decades, the economy has badly skewed into a dangerous imbalance favoring a minority of wealthier Americans, clouding a reality of growing poverty and an absence of financial security for a majority of the U.S. population who don’t have adequate savings and live paycheck to paycheck even when holding decent jobs. Millions of Americans may go back to work, but still be on the hook for missed rents, student loans, and credit card bills. And meanwhile, states and local governments face daunting budget gaps, which the federal government will be reluctant to fund given huge deficits. That could lead to layoffs of government workers and contractors. A V-shaped recovery for the few may not be shared by the many. And that could be an ongoing drag.
Urban Flux Young people won’t be happily working remotely from suburbs or the mountains on an ongoing basis. Covid hasn’t dimmed their desire for bright lights, social interaction, and the stimulation of big city environments. They also want to be near transportation hubs for easy mobility. You already see the move back in from parents’ homes. The burbs, meanwhile, remain boring, disconnected and car dependent. But for now, while the virus rages, suburban enclaves feel safer for more mature age cohorts who are more vulnerable to the disease, pushing up demand for single family residences. In the near term, the big cities will be tax revenue challenged. In recent decades, city dwellers and businesses have put up with higher costs, because of relatively safe and clean environments and accessibility to energizing 24-hour urban amenities—cultural, entertainment, events, and dining. No doubt rising crime, more rats, failing mass transit, and crumbling roads could change that equation over time, and federal bailouts will be a necessity to reclaim the lost urban vibrancy.
Hot Growth Redux Everybody talks up Nashville and Austin. There also is the familiar cyclical hype about businesses leaving California and heading for Texas, Florida or Charlotte, lower tax places where businesses and their executives can protect more of their profits and earnings. Then again, how many times has California been buried as a high-tax wasteland that nobody can afford? Every decade or so, we also have anticipated Manhattan office and residential cratering as companies lured by tax breaks head to nearby Connecticut and New Jersey satellite hubs. Now investment banks look to South Florida. The hot growth places will continue to grow, because they have room to grow. They have cheaper land and for now cheaper costs. But like the New York suburbs, growth leads to higher outlays for maintaining infrastructure and necessary services, which lead to higher taxes, including property and sales taxes and eventually income taxes. And many hot growth places are just getting hotter—Texas, Arizona, Nevada and Florida now face annual, lengthy, almost unbearable summer heatwaves. In fact, water availability is becoming more of an issue in all four states as population growth taps into diminishing sources—caused by reduced snow pack out West and salt water infiltration in Florida. Absent water Nevada and Arizona could revert to inhospitable deserts aka real wastelands. Colorado (Denver) and Utah face water issues too. Meanwhile, Houston, the grandpa of hot growth markets, suffers through another bust. Over development on cheap land inevitably leads to that outcome.
Inevitable Office Downturn Whether in Buckhead or the Loop, the outlook for office demand appears upended by a real paradigm shift. Landlords are girding for tenants to reassess and reformulate their space needs, ultimately leading to a reduction in leasing requirements. Companies won’t lose the opportunity to pad bottom lines by letting people work remotely and their employees can retain more of their income by eliminating costly commutes. Tenants will want flexible office layouts to bring people together several times a week or at least several times a month to build corporate cultures and gain the benefits of face time. But everyone doesn’t need to be in the office every work day—the pandemic conclusively proved that out. Office space becomes less integral and less important and has less value. We will need less of it on a per capita basis. The question becomes how much less—10%, 20%, 30% or more? And what happens to restaurants, delis, and various retail outlets that feed off 9 to 5 office traffic, which will be diminished? It adds up to lower rent growth and smaller returns. And that’s not good for office markets anywhere, especially in central business districts.
Apartment Troubles Talk revolves around transforming some center city office into residential which could make cities more affordable to live in. But the greater apartment supply will result in lowering what have been arguably inflated residential values in big cities just after a ramp up in new construction for luxury condos and rental apartments. Gulp for current luxury apartment owners, developers and their lenders while there is greater opportunity for millennials to stick around. Affordable housing for the urban poor remains off radar screens, because private capital can’t make any money on it. And public housing will stay low on the list of funding priorities from government sources, squeezed by the huge deficits and tax cutter impulses. The poor continue to lose out.
Retail Slide Continues The ubiquitous signage plastered on retail properties these days isn’t for branding. Whether on main streets, in strip centers and most of all at regional malls the storefronts rather showcase “For Rent.” No news here. A vaccine may slow the trend away from brick-and-mortar shopping and help re-open restaurants and bars, but it offers no inoculation against further e-commerce incursion.
Hotel Recovery Likely Interestingly, hotel stocks have rebounded in expectation of a likely post-Covid tourism surge into the reduced supply of rooms precipitated by pandemic related closings and bankruptcies. People want a change of scenery for sure and the always boom-bust hotel business can bounce back quickly for the survivors. While tourist travel will certainly resume, business travel may be another story. Zoom technology could curtail at least some lets-meet-in-person trips that are no longer really necessary. Cut the hassle, the costs, and the time spent in transit. Corporate bean counters especially will like that.
No matter the challenges, getting vaccinated will certainly help make for better months ahead.
And if you own industrial, it will be another banner year.
But most importantly, stay healthy in the meantime.
Jonathan D. Miller is a veteran industry analyst and partner at Miller Ryan LLC, a strategic marketing firm