RCLCO: Cycle Planning During a Pandemic
RCLCO Real Estate Advisors, Washington, D.C., said it’s “fairly clear” the U.S. economy is headed for a recession.
“Now the question is not whether an economic downturn is coming, but rather how deep will this downturn be and how long will it last and what should those of us in the real estate industry be doing about this in the near-term,” said RCLCO Managing Director Charles Hewlett in the report, Cycle Planning in an Age of COVID-19.
Hewlett noted some reports from China–where retail sales fell 30 percent and industrial output declined 13 percent—that now indicate commerce is returning. “The hope and expectation is that the recovery there will be fairly rapid now that the number of new confirmed cases is close to zero,” he said. “This may well prove to have been a V-shaped downturn for China, lasting only two quarters or so.”
The U.S. could see a similar scenario, Hewlett said. “In spite of a slow response to coronavirus so far, the country now appears to be gearing up to take measures that will, if not contain, lessen the impact,” he said. “Sadly, the extent of the damage to the economy and the ability to rebound from still-unfolding disruption is still unknown.” He said the U.S. could experience one to two quarters of negative GDP growth then return to positive growth as the economy responds to pent up demand in second-half 2020 if the U.S. follows China’s trajectory.
But while plausible, this represents a best-case scenario, so it would be prudent to plan for a disruption that could be longer, deeper and more severe, Hewlett cautioned.
Some CRE sectors will be hit harder than others, Hewlett said. Hospitality, leisure/resort and retail/entertainment top that list. “It is likely that retail, office and industrial tenants will start looking for some relief in the not too distant future,” he said.
Real estate companies should not panic, Hewlett said. “While this is a novel virus, cycles are not new and we’ve seen shocks like this before,” he said. “There are immediate action plans that real estate companies should deploy, and you no doubt have already done so, to keep your employees, vendors, partners and valued residents and tenants in your buildings safe. You know the drill by now: frequent and thorough hand washing, flexible work-from-home policy wherever possible, travel/meeting restrictions, self-quarantining where prudent/necessary, social distancing, etc. Fortunately, most of us in the real estate industry are playing the long game, and developments and investments we are making now will play out over years, not weeks and months. There may be some temporary hesitation to make commitments in the face of uncertainty, so negotiate extensions on contracts, revisit terms where necessary and walk only if you must. But in time, asset values will regain the ground lost during the downturn and then some.”