Investment Outlook 2020
It is inevitable that the US economy will have a recession during the 2020 year because of COVID-19. We should to go back to the last recession of 2008, examine the similarities and differences, and identify opportunities for the next 3–4 years.
In 2008 the US unemployment jumped from 4.6% to 9.6% in 2010 and got down to 5.3% in 2015. The US GDP went down 2.5% in 2009, and was back up in nominal terms in 2012 with a growth of 2.2%. (Note that 2011 was the devasting Japan earthquake that further delayed growth). The DOW Jones went from a 13,500 high in 2007 to a low 6,300 in February of 2009; a 53% drop. The DOW reached again 13,500 February 1st 2013, and went to 17,000 in December 2016 (before Trump took office)
The above numbers suggest the resilience of the US, and in combination with the right mix of stimulus Federal economic policies, we can be optimistic in the long run. However, this crisis is different than 2008. We are witnessing a demand shock, as businesses are closing down, people are sheltering in place and economic activity that depends on human interaction has been shut down. Estimates for the unemployment suggest a spike up to 20% for the next 6 months, and businesses in the hospitality and travel will be forced to shut down.
For Real Estate, we will see a wave of delinquencies in rents, and as a result in mortgage payments.
Commercial real estate with mixed retail use will be the first one to take a financial hit, while business offices and above average rentals will do better. The key question will be the type of Federal assistance to banks, and as a result the trickle down of leniency to mortgage payments and rents. Construction will slow down, both as a result of the mandatory requirements and as a result of economic conservatism from developers. Many developers will have to deal with overrun costs, missed deadlines and as a result a freeze on the loan disbarments. Properties on the market currently, will take a down-turn, as investors and developers will prefer to take a wait-and-see approach, slowing down demand, and as a result the prices. In “hot” markets we will not see a drastic price drop, rather a zero growth; where in less developed markets we can expect a 5% drop. We will enter a period that “cash is king” and the ability to raise money and deliver results will be in high demand, reaping rewards.
The consumer behavior will also be changing. Consumers and their decisions drive 70% of US GDP and even a slight change in their behavior will mean an enormous economic consequence. In the 2008 crisis the millennia generation took a substantial financial hit, and since then they have altered their behavior to buying less homes and cars, rent smaller apartments with amenities, and lost “faith” to large corporations after massive lay-offs. Those life changes drove many investment decisions, and today we see the new trend in housing development and co-working spaces. Expect similar behavioral changes, with an increase in tele-working, less commuting, and an increase of on-line deliveries. As a result properties near “hubs” will see the strongest gains.
From a geopolitical point of view, the oil market will take a longer time to recover. The “oil war” between Saudi Arabia and Russia is at the moment a greater threat to the oil industry than the consequences of Covid-19. The global slow down of demand and travel will keep oil prices low. In 2009 the low was $85 per barrel and was back up to $140 in 2011; the expectation is that oil will take 3–5 years to reach back to $75 per barrel, unless there is a major geopolitical disruptive event.
A last note about venture backed startup. Most of their management is young, and has not faced a crisis like this. During the last 12 years we have a steady growth with limited disruptions, and certainly nothing compared to this. Venture capital will have to make decision on what startups to fund and provide cash to keep operating. There will be several startups that will have to close or pivot, dropping valuations.
In closing, I will quote Sequoia Capital from their Covid-19 memo to CEO’s: “Having weathered every business downturn for nearly fifty years, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”
