Victor Calanog: It is a certified crisis at this point and not an idiosyncratic event that we thought we would get over by the summer or fall.
From a retrospective look at how our perspectives have changed, firstly, it is a pretty serious health crisis and people are acknowledging this by the sheer number of people who have died and its global reach.
Also, it has been pretty surprising how certain property types, geographies and economic sectors have both suffered extensively but also prospered from this crisis.
Let’s start with the good news. The housing market in many parts of the US has never been stronger.
One of the drivers for this is an accommodative monetary policy from the Fed, which is keeping interest rates low. Mortgage rates are at historically low levels, which has propped up the financing of properties.
“It is a certified crisis at this point and not an idiosyncratic event.”
There is also increasing evidence that households who have been postponing their decision to buy or move are now exercising these options, which is benefitting the housing market and making it one of the winners through the pandemic.
Warehousing and logistics is benefitting from a change in consumer behaviour. This is nothing new; We all knew that e-commerce was on the rise.
It rose from being less than 1% of total retail sales when the internet started becoming a viable commercial platform in the year 2000 or so, to its current official number in the order of 16% as of the Q3 2020. This has been a 20-year process, but this crisis has really accelerated this behaviour.
At the beginning of the pandemic, e-commerce represented 11.3% and jumped to 16.1% by Q3. This represents about 10 years’ worth of growth in a matter of 2-3 months.
“Warehousing and logistics is benefitting from a
change in consumer behaviour.”
Some of this was by choice, however, many households in the US were forced into buying online. I don’t feel that the pendulum will swing back even as we reopen the economy and as vaccines become more widely available.
People who have discovered the convenience, ease and relative safety of online shopping will not likely completely go back to shopping in physical stores.
The winners here are not just the landlords, but also the industrial logistics firms who are operating storage facilities.
In addition, retailers who have expanded into omni-channel retail, including Target and Home Depot, are greatly benefitting from this shift.
The increase in working from home will also continue to benefit the success of online shopping as consumers continue to upgrade their live/work environment.
“The increase in working from home will also continue to benefit
the success of online shopping.”
The bad news throughout our current predicament is that travel restrictions are keeping people at home, which has negatively affected the leisure and hospitality sector, including restaurants.
We are not projecting leisure and hospitality jobs in the US to return to end of 2019 levels for another 5-6 years at the very least.
That calls into question the fate of places like Las Vegas as a destination. Cities like these draw revenue from people flying and attending business conferences, on top of the visitors that go for leisure. As a result of this decline, there will be continued uncertainty in this sector.
Victor: You should be looking at your bread and butter, rents and vacancies, since this is ultimately what is going to determine income potential.
You want to keep close tabs on this in particular issue because for some commercial property types, there is always a 3 to 6 quarter lag between when the economy starts collapsing and when the actual distress is reflected.
You should also be open to other alternative data sets and developments in platforms. Infrastructure, alternative monitoring and data have really improved by leaps and bounds.
As an economist, it is great that I have a bigger digital playground to access data to anticipate what the early warning signals might be.
“You should also be open to other alternative data sets and
developments in platforms.”
There are companies who are providing very good, almost real time monitoring of mobile signals, including whether or not foot traffic has returned or has yet to return in specific places.
These are areas that I would look to for potential early warning signs. I feel that you shouldn’t take any collapse as evidence of a trend, but rather monitor it and see whether the collapse of a particular asset has truly happened, or if it has the potential for a bounce back.
I would also take a step back and look at the macro environment. Real estate is no longer just a local play, given how global this pandemic is.
You have to look at what happens halfway around the world, since it has a significant effect on us. I would suggest looking at news sources and making up your own mind by thinking through events.
“Real estate is no longer just a local play, given how
global this pandemic is.”
Stay abreast of all of the trends that you don’t believe might impact your sector because, over the long run, they actually might have a substantive effect.
I highly recommend having conversations with thought leaders, within the industry or with peers. Ask questions and monitor the market. Stay informed and, more importantly, think critically about what is going on because this is a situation that I am not sure anyone has a complete handle on.
More often than not we have to open our minds and make decisions based on the best available information. Even with all of that I have said, keep your sceptic hat on.
You must battle test all of the data and the thinking out there to see what is actually happening so that you can make good decisions.
