REAL ESTATE INVESTMENT OUTLOOK JUNE 2020

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There has been no previous occasion for this kind of downturn of economic activity. Recessions or severe economic slowdowns are usually caused by the exchange between economic and/or financial differences during the period of expansion. According to a leading real estate research company, calstatecompanies, this time it is very different because the underlying cause of the downturn initiated from external economic and financial domain: a highly contagious new coronavirus that has been spreading fast since the beginning of the year.

Our government has responded by aggressively curtailing economic and social activity in order to suppress the further spread of the virus as quickly as possible. Thus, we are seeing the first-ever recession by government decree – a necessary, temporary, and partial shutdown of our economy to prevent an even larger humanitarian crisis which is having a devastating effect on real estate investments.

Since the beginning of March, approximately 40 million workers have lost their job in the USA, with 18 million being laid off temporarily due to the lockdown. According to the US Bureau of Labor Statistics, most of the 18 million workers are in the lowest income brackets, with an average weekly income between $300 and $1,100. Under the assumption that this temporary unemployment lasts around one quarter, private consumption could be lowered by $150 billion, representing a GDP loss of approximately 3% for a given consumption rate of around 70% of disposable income. It is absolutely paramount for a sustainable economic recovery that the predominant majority of these job losses are temporary once the lockdown measures are lifted. Reemployment, especially in service-related sectors, will return but only gradually.

The aggressive policy support is expected to release domestic demand. Persistent pressures in the labor market and mounting external risks have driven the country’s leadership to stimulate the domestic economy. Infrastructure spending still remains the main growth stabilizer. We expect the fiscal deficit to expand meaningfully by a significant increase of percentage points of GDP rates in the near term. Credit growth is expected to firm up throughout the year, with a notable amount of funding likely to be directed into the infrastructure sector. However, the above-mentioned stimulus cannot fully offset the economic damage throughout the year.

There is agreement among economists on the need to stimulate growth once the epidemic is under control. There are concerns about longer lasting impacts that hamper the recovery (affected sectors, lack of confidence, and increase in household savings during the lockdowns). Stabilization plans will therefore gradually have to give way to growth stimulation plans.

Given the rapid and large economic and fiscal policy response and in the absence of major imbalances that would require a prolonged period of purging and modification, we expect the real estate investment markets to transition from intense near-term anguish during the virus suppression phase to a gradual healing over six to 12 months