Economist Mark Dotzour recently shared his views on the coronavirus pandemic’s impacts on the economy and commercial real estate in an exclusive webinar with NAIOP’s National Forums members. At the end, he answered questions from attendees.
Q: What’s your take on the impact of the virus pandemic on real estate markets in secondary and tertiary cities as contrasted with Tier 1 markets?
A: I don’t know that there’s any difference … this virus doesn’t care whether you’re in Tulsa or San Francisco. I will say that I’m more bullish on commercial real estate investment in secondary and tertiary markets because the yields are higher. The big markets got overshot and yields got too low, so I’m still bullish on secondary and tertiary markets. The urban vibe has lost its luster. I could see some additional demand for people moving to smaller cities.
Q: With the printing of money, are you saying that classic inflation is going to be muted because the interest rates are being kept low? How long is that sustainable?
A: That harks back to that quote I had where we’re not living in a normal world anymore. The free market doesn’t function anymore. It’s all manipulated. So the idea of classic inflation hasn’t been relevant since 1982. We had high inflation that ended in 1982, and now it’s 38 years later and we haven’t had inflation since. I don’t think there’s any such thing as classic inflation anymore. Look at Japan; their debt-to-GDP ratio is double ours. Have they had inflation? They can’t get it. They haven’t had any inflation since 1987. What about the value of their currency? It’s still stronger than ever. This is what happens when a government completely manipulates the stock market and the bond market. Our dollar is going to stay strong, inflation is going to stay low and interest rates will stay low, too.
Q: Assuming they are successful in developing a vaccine by fall, do your assumptions change regarding recovery types and velocity?
A: Absolutely. That would be on my Santa’s wish list. I would love to have a vaccine that just erases this problem permanently. The underlying economy was very strong. It was the strongest economy on earth before this happened. Our government decided to print money into the $2 trillion to $3 trillion range to try to just hold the economy in place. If we could just give people enough money to make it through these 90 days and the virus fades and we reopen again and get back to normal, that was a legitimate idea at the time. But as we go further down the road, you can see the damage that happens to restaurants, airlines, hotels and all the rest. If we get some really good news on the virus, my hypothesis will refocus to the upside big time.
Q: Do you have an opinion of the timing required for supply chain changeover? With the slow scattered reopening that will vary state by state, what is the current thinking to strike a balance to meet changing demand?
A: I wish I had the answer to that question. Whoever asked that question, you’re a genius. I don’t have that answer. It feels like it’s slow, though. Just like the toilet paper thing. It’s not like people are hoarding toilet paper. Let’s assume a third of it went to grocery stores and two-thirds went to restaurants and office buildings. The quality at the office isn’t as good as what you buy for the home and it’s often in a gigantic roll, so I would say if the supply chains could change quickly enough, we would have more toilet paper than we could imagine at the grocery store. If the supply chains could change fast, we wouldn’t have farmers pouring out milk. I think it’s going to be a while. It takes longer than you might think.
Read the recap of this webinar: “Americans Don’t Hide in Their Houses for Very Long”