Economic Update (August 31 - September 4, 2020)

[Lloyd Segal]

Economic Update
(Monday, August 31, 2020)

The US economy got crushed in the second quarter, with the worst decline in real GDP for any quarter since the Great Depression. However, the good news for real estate investors is that the long road to recovery has started. And we are partly responsible because of all the parts of our economy that have weathered the COVID-19 storm the best, none has been more resilient than real estate. If you can remember back to pre-historic times (i.e. February of this year), existing homes were sold at a 5.76 million annual place -- the fastest pace since the housing bubble burst. Then sales plummeted in March, April, and May, the slowest since 2010. Since May, however, sales have soared, hitting a 5.86 million annualized pace in July! Even beating where we were in February! Part of the recent gain was likely pent-up homebuyers: people who wanted to buy earlier in the year but got temporarily thrown off track for three causes: (1) the Coronavirus, (2) massive economic contraction, and (3) general uncertainty about life returning to normal. But including the drop and the rebound, the average pace of sales in the last five months (March through July) continues, suggesting further gains ahead. Dense inner cities hit hard by COVID-19, or which have seen social unrest (or both!) are going to be relative losers; other metro areas are going to experience faster gains. Plus, homebuyers (with the newfound ability to work remotely from home) will move out of denser urban areas and into the suburbs and x-burbs. With this in mind, let’s fasten our seatbelts, put on our face masks, and turn on the after-burners..

California Job Growth. Employers added only 140,400 payroll jobs from mid-June to mid-July to a total California workforce of nearly 15.8 million. The July job gain was dramatically less than the record 542,500-job rise in June when restaurants, gyms and other businesses briefly reopened amid hopes that the virus was abating. California’s unemployment rate lowered to 13.3% last month, down from 14.9% in June. (A year earlier, it stood at 4%.) July’s forward progress is welcome, but measured against historical benchmarks, the California labor market remains very much in the ICU. For the week ending Aug. 15, California’s new unemployment claims fell to their lowest level in five months, with 201,600 applications submitted to the state Employment Development Department. But a staggering 4.8 million Californians are still collecting jobless benefits. Worse, California businesses continue to announce they are closing permanently. Any economic recovery we say in June and early July has now stalled. Over the last three months, California has regained less than a third of the 2.6 million jobs lost during March and April as the pandemic took hold. And the state’s jobless rate remains a percentage point higher than its 12.3% peak during the Great Recession. Los Angeles County’s economic picture is particularly dire, with a July jobless rate of 17.5%, down from 19.4% in June. (A year earlier, it was 4.4%.) Many of L.A.’s tourist-dependent industries, including hotels, restaurants and theme parks, remain closed. As its unemployment rate dipped slightly, the County’s payrolls dropped by 3,600 jobs to 4,093,500. L.A. County employment was down 9.4% over the year, with leisure and hospitality jobs plummeting 30%. If economists are doubtful that July’s job report offers much hope, they are even more pessimistic about the direction of California’s economy in the fall. California’s economic recovery will depend on whether the federal government can enact more stimulus measures, including unemployment benefits, and on curbing the COVID-19 infection rate. And that depends on Californians choosing to wear face masks, staying at home when possible, and following state and local guidance on coronavirus measures. “It is what it is.”

Pending Home Sales. The Index of Pending Home Sales rose 5.9% in July as compared with June, the eternally-optimistic National Association of Realtors reports. It is the third consecutive month in which the level of Americans signing contracts to purchase homes has risen. Compared with a year ago, contract signings are up 15.5%. The index measures real-estate transactions where a contract was signed for a previously-owned home but escrow had not yet closed (benchmarked to contract-signing activity in 2001). With demand for homes so high, properties are flying off the shelf. Nine contracts are being signed for every 10 new listings. The NAR now expects existing-home sales to increase to a pace of 5.8 million in the second half of the year. If that happens, the rate of sales for the entire year would be 5.4 million, which equates to a 1% gain from a year ago. That is amazing considering we are in the midst of a pandemic. Demand for homes is high, high, H-I-G-H. Why? Because pent-up demand caused by the delayed spring home-buying season has combined with new demand created by low mortgage rates and a desire among many Americans to move to the suburbs in search of more space (as people continue to work and to educate their children from home). However, the housing market does have one major challenge that will prevent sales volumes from hitting records: Inventory. The number of homes available for sale is historically low, and after all, buyers can't purchase what's not for sale. So unless more people are inspired to put their homes on the market, the nation's low inventory will limit how far sales volumes can climb for the foreseeable future.

New Home Sales. New single-family home sales increased 13.9% in July to a 901,000 annual rate (a third consecutive monthly gain). Remarkably, new home sales are now 16.4% higher than the January high (before COVID-19 hit the US economy). A couple of factors should continue to keep new home sales strong in the months ahead. First, affordability. Near zero interest rates from the Federal Reserve have helped reduce 30-year fixed mortgage rates below 3% for the first time on record. Second, due to the pandemic and urban unrest, buyers' preferences are shifting away from denser urban environments, toward the more spacious options in the suburbs (where most new single-family homes are built). Finally, there is still pent-up demand from potential buyers whose purchases were temporarily disrupted by lockdowns and widespread economic uncertainty in the wake of the pandemic. However, a lack of finished new homes could be a headwind for sales going forward. In the past year, the only portion of the inventory of unsold new homes that has increased are homes where construction has yet to start. Meanwhile, the inventory of unsold homes that are finished is dramatically down from a year ago. Given the downward pressure that social distancing regulations, shortages of labor, and supply chain issues continue to exert on new construction, do not expect an oversupply of homes anytime soon. This is reflected in the months' supply (how long it would take to sell today's inventory at the current sales pace) of new homes for sale, which fell to 4.0 in July from 4.6 in June, tying the lowest level since 2004! As a result, home prices should continue to rebound in the next several months.

Converting Stores to Housing. The COVID pandemic has caused dozens of formerly ubiquitous retail chains to declare bankruptcy and shutter stores, leaving an unprecedented amount of vacant commercial space. But there could be an upside. HUD is exploring ways to turn vacant commercial space into affordable housing. So-called "Adaptive Reuse” has been happening in Los Angeles since 1999, when the city enacted an ordinance that allowed historic buildings downtown to be converted into housing. But with more consumers shifting their shopping from brick-and-mortar to online stores, and many workers now telecommuting, the city plans to earmark more buildings for residential conversions. And it couldn’t be happening at a better time! Nationally, about 25,000 stores could close this year because of the pandemic, according to Coresight Research. That’s coinciding with a growing need for more affordable housing. The Southern California Association of Nonprofit Housing estimates there is a current shortage of 551,807 rental homes for households earning less than $41,500 in L.A. County. Earlier this month, City Planning Department unveiled its “Downtown Community Plan” to expand adaptive reuse to warehouses, manufacturing facilities, parking lots, and other types of under-utilized buildings as part of its first application of new zoning rules designed to make it easier to build housing. For example, Los Angeles is home to 675 mini-malls, taking up 24 million square feet of space. While these mini-malls are becoming increasingly vacant (the economic downturn accelerating small business closures), they present a great opportunity for residential conversions. Moving up in size are shopping malls and big box stores, which occupy 400,000 to 800,000 square feet of space. That’s enough square footage to accommodate between 750 and 1,500 living units per mall at the national average of 526 square feet of apartment space per person, according RentCafe.com. Converting them, however, will be challenging. Malls have complex retail and legal structures. Plus, it’s very expensive to convert commercial space into residential because of the need for bathrooms, kitchens, living areas, and safety once everybody is under a roof. Bottom Line: there are ample supplies of vacant retail and commercial properties, but we need to overcome the cost hurdles to convert these buildings to affordable housing.

Consumer confidence. Consumer confidence fell in August to a new pandemic low after a fresh rash of coronavirus cases during the summer caused Americans to turn more pessimistic about an economic recovery. The index of consumer confidence sank to a six-year nadir at 84.8 this month from a revised 91.7 in July, the Conference Board reports. The surprising decline in consumer confidence puts the index below April’s 85.7 reading during the height of the economic lockdown. It may have also been spurred by the expiration of the $600 federal unemployment stipend at the end of July. If you recall, a rising level of confidence in May and June faltered during the summer after a new coronavirus outbreak largely in the South and West. So it remains to be seen if confidence starts to rise again with Covid-19 case receding. Americans are just as pessimistic about the near future. Another gauge that assesses how Americans view the next six months — the so-called “Future Expectations Index” — dropped to 85.2 in August from 88.9. That’s also a new pandemic low. Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead. True, Americans are venturing out to eat more often, salons are accepting clients again (albeit outside), and movie theaters have started to reopen, but it’s just not enough. The persistence of the coronavirus, the expiration of temporary federal benefits, and still-high unemployment are likely to keep our recovery from speeding up much before the end of the year.

Back to School. While we debate whether schools should re-open, people don’t appreciate that schools are a vital, if often overlooked, cog in our economy. Schools have an enormous economic impact. They provide child-care for working parents, fuel spending at retailers, and fund businesses that provide food for cafeterias and dispose of the garbage they create. Their absence could cost the economy $700 billion in lost revenue and productivity—and that’s before considering potential long-term damage to the labor market. That's a large number. The most direct impact is on retailers! In an ordinary year, back-to-school is second only to the holiday season for retailers, representing about 15% of annual sales for department and specialty stores. Beyond retail, the casualties could be vulnerable companies like school-lunch provider Aramark, janitorial services firm ABM Industries, and sanitation firm Waste Management. But, all of this pales in comparison to the biggest hit by far, from lost productivity as parents juggle work and child care. The Brookings Institute estimates that lost productivity alone is costing our economy over $56 billion a month. That translates to more than $500 billion over a nine-month academic year—or 2.3% of gross domestic product—if schools nationwide stay closed. And that’s not even considering the social and educational effects on our children.

Cox’s Castle. “Friends” star Courtney Cox has checked out of her high-rise condo. Last month, the actress cut an off-market deal, selling her longtime residence at the Sierra Towers building on Sunset Blvd. in West Hollywood for $2.9 million. Owned by Cox for more than a decade, the condominium is next door to Joan Collins’ former residence, which sold three years ago for $4.4 million. Found on the 25th floor, the unit has one bedroom, two bathrooms and sweeping views of the Hollywood Hills. Floor-to-ceiling windows and an open-concept floor plan are among the features of note. Two covered parking spots were included with the 1,315-square-foot unit. Originally built as an apartment building, the 31-story Sierra Towers has been home to stars such as Cher, the late Diahann Carroll, Lily Collins, David Lee and Jerry Leiber, among others. The high-rise, on the western end of the Sunset Strip, features amenities such as a concierge service, a gym and a swimming pool. Cox, 56, is set to reprise her role as news reporter Gale Weathers in the upcoming “Scream 5” sequel. Earlier this year, it was announced that she and the rest of the “Friends” cast will appear in a reunion special on HBO Max.

Durable Goods. Orders for durable goods (items lasting at least three years) surged 11.2% in July largely because of strong consumer demand for new cars and trucks. Orders for new cars and trucks jumped 22% last month after a nearly 24% gain in June. Auto sales have been surprisingly strong during the summer as Americans took advantage of low interest rates and discounted pricing, even though they had nowhere to go! Orders in July were actually higher last month compared to July 2019. But auto orders are likely to moderate now that plants have re-opened and auto manufacturers are operating closer to normal capacity. Sales to corporate customers are still depressed and demand usually wanes in the fall. Airline orders only declined half as much in July as they did in June, the government said, reflecting fewer cancellations. Boeing, for example, has suffered hundreds of cancellations and received very few orders for new planes this year after travel around the world plunged during the coronavirus crisis. The company had already been under severe financial strain after the grounding of its 737 Max super jet following a pair of deadly crashes last year. And the future isn’t looking much better. American Airlines, Boeing’s biggest customer, said it would furlough 19,000 workers because so few people are flying. Nevertheless, orders increased 4% for electrical equipment including appliances, 2% for fabricated-metal parts, 2% for machinery and 2% for computers and electronics. The good news is that key parts of our economy have returned close to pre-crisis trends. Auto and most other American manufacturers have rebounded swiftly from the pandemic and fared better than the larger service side. Yet manufacturers can’t grow significantly faster until the U.S. and rest of the world contain the virus and life starts to return to a semblance of normal. But it could take a year or more before that happens.

Zoo Re-Opening. Good news! After closing its gates to the public back in March, the Los Angeles Zoo is finally re-opening to visitors. You’ll notice a few changes, but all your favorite wild creatures are ready to welcome you back. In the coronavirus era, the zoo experience has been stripped down to its barest bones to conform with the Los Angeles County Department of Public Health’s safety protocols. While the animals took a summer vacation (from humans), the zoo itself took a financial hit, losing $11.7 million and seeing a dip in memberships since its closure. Reopening has required a great deal of care and planning. Gone are the days of giraffe feedings, peering into telescopes to spy on zebras, or crowding along the fence to watch long-legged flamingos stretch their wings. Plus, you won’t be riding a carousel or having your face painted. A full list of what is open and closed can be found on the L.A. Zoo website, LAzoo.org. In addition to concerns about keeping guests, staff, and other humans safe while at the zoo, COVID-19 also presents a risk to the rare wild animals the zoo works to conserve. I mention this because at a zoo in New York City, more than a dozen lions and tigers tested positive for the virus (obviously not social distancing), and experts have long cautioned about the ease with which apes can catch respiratory illnesses from human visitors. With that in mind, your visit to the L.A. Zoo will require a mask and observe physical distance. One of the most substantial changes is that the L.A. Zoo now requires booking tickets online in advance of your visit. The number of visitors allowed at any given time will be capped to make sure everyone–human and animals–can enjoy the experience safely. The zoo is now limited to 1,200 visitors daily with 200 people per hour within the facility (which covers over 100 acres). Outdoor eating facilities are closed, but visitors can still buy grab-and-go items. Even with health-protective modifications in place, the lovable lions, tigers and elephants have new “neighbors” eager to meet you. Particularly Angela, a 7-month-old western lowland gorilla, spotted clinging to her mother’s back. And don’t miss the litter of four meerkat pups popping in and out of their burrows. Do you think the animals missed us?

Koreatown Developer. Koreatown-based developer Jamison Services, Inc. is having a busy year, even in the face of Covid-19. The family-owned company has developed 2,000 units and opened 120 units this year. At the start of 2020, Jamison had 3,000 multifamily units under construction. Its most recent opening was the 120-unit Crosby South project in Koreatown. The company expects to complete another 1,400 units by the end of the year. Other Jamison projects in the works include recently filed plans for a 262-unit property with nearly 10,000 square feet of retail on the border of Koreatown and Westlake. Jaime Lee, chief executive of Jamison, said March and April were slow for leasing, but June and July brought a big increase. Jamison projects like The Audrey have rooftop patios, workspaces and other amenities geared toward young professionals. These projects generally have a lot of amenities. Some of the developments opening this year even have workspaces, similar to a business center, which Lee said is appealing to the company’s target demographic, especially as people are working from home. It is also following new guidelines for gyms and pools. Multifamily properties are expected to fare better than some other property types going forward. One of the biggest question marks at the moment for Jamison revolves around retail, which is included in many of the company’s projects. Some food operators are looking to expand, often with a model that’s heavy on carryout and requires smaller footprints. Others are looking to shrink their spaces. And for tenants, office spaces may change. People are unlikely to work remotely forever and are de-densifying the office spaces, putting up dividers, increasing fans and outdoor airflow. Things like upgraded filters and hand sanitizer stations are also being discussed and implemented. CBRE expects negative demand for office space globally this year and anticipates that rents will decline 3% to 6% next year in most markets. And even that is optimistic. During the second quarter, office spaces in L.A. were 13.3% vacant, up from 12.7% the previous quarter. Asking rents were $4.01 a square foot, down 4 cents from the previous quarter.

Judy Garland’s Hollywood Haunt. Dorothy, we’re not in Kansas anymore. The Hollywood Hills estate — which at different times was owned by actress-singer Judy Garland and Rat Pack member Sammy Davis Jr. — just sold for $4.675 million, about $1.5 million shy of the original price tag. Perched high above the Sunset Strip, the hillside home was built in 1941 by architect-to-the-stars John Elgin Woolf, who designed houses for Cary Grant, Barbara Stanwyck, Bob Hope and more. Garland lived there in the mid-1940s with her husband, director Vincente Minnelli, and their daughter, Liza Minnelli. It was later owned by actor-comedian Wally Cox, who sold the place to Sammy Davis Jr. in 1955. During Davis’ stay, the rock group the Band lived and recorded on the property. Today, the house spans 5,000 square feet with five bedrooms and 7.5 bathrooms, taking in sweeping city and canyon views from multiple decks and patios. Interior highlights include an indoor-outdoor living room, a master suite with a private balcony and a screening room with a hidden bookshelf door that accesses a secret bedroom. Across the property, a guesthouse adds chic elements such as a custom fireplace, marble bar, billiards room and sleeping loft. The grounds cover a third of an acre and hold landscaped gardens, fruit trees and a swimming pool.



High-Speed Rail from LA to Vegas. Alright high-rollers, are you ready?Plans for a $5 billion high-speed rail line connecting Los Angeles to downtown Las Vegas took several steps forward this week. Miami-based Brightline Trains is gambling $200 million it received in bonds from the Nevada State Board of Finance to help fund its planned 170-mile high-speed rail line between downtown Las Vegas and Victorville, which has a target completion date of 2023. From there the route will continue on a 50-mile spur south through the Cajon Pass to the Inland Empire city of Rancho Cucamonga. From there the rail line would connect to an existing Metrolink station that in turn would carry passengers west through to Union Station in downtown. In the alternative, Brightline is also wagering on a spur from Victorville to a Metrolink station in Palmdale, then using Metrolink’s existing tracks to carry the high-speed train south to Union Station. Either connection would give Angelenos their first opportunity to take high-speed ground-based transit to Las Vegas, although the odds heavily favor the Cajon Pass spur. Much of the core route from Las Vegas to Victorville would be built within the median of Interstate 15, which is now the main vehicular route between Southern California and “Lost Wages.” Trains would take roughly 85 minutes to traverse the route at speeds of up to 200 miles per hour. Brightline already operates the only privately funded high-speed rail line in the U.S., connecting Florida’s West Palm Beach to Miami. So, if it works in Miami – it can work here!