The coronavirus pandemic has challenged American society on many levels, but according to economist Mark Dotzour, it has yet to reckon with an important aspect of the national character.
“Americans do not tolerate deferred gratification,” Dotzour said during a recent webinar for NAIOP’s National Forums members. “We’ll either conquer this virus or get used to it. Americans don’t hide in their houses for very long.”
Dotzour gave Forums members his outlook for the post-pandemic economy. In the big-picture perspective, he said he thinks there will be a strong recovery eventually, but it won’t be an easy climb.
“I feel like we’re going to have a terrible GDP in the second quarter, but I feel like we’re going to turn the corner in July, and the tech sectors, service and housing will come back quicker,” he said. “I see this being a gradual recovery. People act like it’ll be a V-shaped recovery. I don’t see that at all. Others see it as an L-shaped recovery, meaning we’ll never recover, and that’s foolish sensationalism. But it is going to be gradual.”
Dotzour predicted that hotels, restaurants and casinos will be slow to recover, as will airlines and airports.
“The biggest question in my mind is how long it will be before we feel comfortable to do anything,” he said. “How long before we are ready to go to a restaurant, go to a convention, take a vacation or go to a basketball game?”
He also said he sees the oil and gas industry continue to decline amid a historic slump in demand brought on by business closures and social distancing measures.
“Demand has fallen off a cliff,” he said. “Think about all those airplanes parked on runways. This is going to be a tough one for the oil and gas business. It isn’t going to go away overnight. There’s going to be a massive amount of business failures, mergers and acquisitions, and a slowdown in production. The Houston economy is going to get hit pretty hard, along with other parts of the country that do oil and gas. The flip side is, if you don’t live in those areas, when you go to get gas for $1.60 a gallon, that’s like a tax cut. That’s always beneficial. That’s a strong suit for the economy going forward.”
Dotzour said low interest rates should be another positive for the economy, because they should stay low for a long time after the Federal Reserve took actions to stimulate the economy.
“Short-term interest rates could stay near zero for at least five years,” he said. “The 10-year Treasury will be lower for longer. There’s going to be a huge search for yield that’s going to cause people to want to own real estate. This is why I’m still super bullish about real estate. Period. The bond market is completely nationalized. There is no yield. Those yields are going to stay low for a long time, at least five years. And the stock market? Who knows how that works? To me, it’s just a big video game. It makes no sense to me. All this volatility in stocks and bonds makes people more nervous and directs more of their enthusiasm toward real estate.”
However, he said there are potential negatives for real estate investment during this time.
“The downside is the government-sanctioned rent holiday for all kinds of real estate throws an additional piece of risk into every kind of real estate,” Dotzour said. “Every piece of real estate in America has a slightly higher risk component to it because of the rent holiday and the threat the government might shut down businesses who are your tenants again.”
A Second Wave and Other Risks
According to Dotzour, if the coronavirus returns next winter, it could seriously hamper the chances for a gradual recovery.
“The key thing will be will we force businesses to close again,” he said. “There are a lot of businesses in this country that lack liquidity. They’re dying right now with their doors closed, and maybe they’re getting a lifeline from the government. If this happens again, a second go-around would be a lot to ask when you’re weak on liquidity. We’ve all heard that fun phrase ‘location, location, location.’ I’m going to modify that for the 2020s and say it’s ‘location, location, liquidity.’ ”
Another risk factor would be an explosion in commercial real estate delinquencies. Dotzour said April rent collections came in at a higher frequency than many thought they would.
“The month of May could be a lot lower,” he said.
Yet another risk is the possible exhaustion of stimulus money before the crisis ends.
“How long does $1,200 last?” Dotzour asked, referring to the Economic Impact Payments that the federal government is sending to hundreds of millions of Americans to offset the financial impact of the coronavirus pandemic. “I feel like many companies will file for bankruptcy or close.”
Dotzour wondered what the impact of the 2020 election could mean for the recovery.
“What will income tax rates look like in 2021? People will be trying to sort this out and making tax-related decisions between now and the end of the year,” he said. “Will banks continue to be treated kindly in 2021 after the election?”
Another issue that worries Dotzour is whether the government can force people to abandon their businesses.
“This is kind of disturbing to me,” he said. “It make sense why they did it, but the fact of the matter is if you’re a business planner, or if you’re an investor, that has got to be in the back of your mind. If we have another go-round of COVID next fall, will we have to close again? That’s a key issue that’s just hanging out there.”
That uncertainty means that “commercial property values are unknown at this point,” Dotzour said.
“I don’t think it’s proper to say that real estate prices have dropped a lot,” he said. “All I see right now is nobody can predict far enough in the future in terms of cash flow to put a value on a building right now. That will change over time. It’s going to be a while before we get enough transactions to know what has happened to property values. With a possible $300 billion in private equity funds loading up to buy distressed assets, I’m guessing that these discounts won’t be anywhere near that much. There’s going to be a lot of dry powder coming into this business, so if there is any downward pressure on pricing, it’s going to be mitigated by an overwhelming response of people wanting to mop up the mess.”
Read the Q&A from this webinar with Mark Dotzour.
Trey Barrineau is the Managing Editor, Publications for NAIOP. In this role, he supervises day-to-day operations of Development magazine.