Job Losses Are Here. How Will CRE Fare?

The coronavirus continued its march across the US and its economy. After two weeks of market turbulence and the widespread shut down of events, conferences (ICSC is the latest real-estate show to postpone its event) and large gatherings, the first signs of job losses are beginning to emerge. They range from airlines to port workers to the hospitality industry to the service industry. Next up will be retail, with many national stores announcing closures for the next several weeks.

A US downturn, experts say, is all but inevitable and indeed over the weekend many forecasters began predicting a global recession. One only has to look at China, which just released numbers showing that its economy suffered far more than expected: industrial production, retail sales and asset investment all plummeted.

Commercial real estate is grappling with this data and trying to come to some conclusions about how its own industry will fare. Job losses, obviously, can have an across-the-board effect on CRE’s food groups. The only question is, where will they be and how severe.

Paul Fiorilla, director of Research Yardi Matrix, prefaces his answer to this question by saying he is a real estate analyst and wholly unqualified to predict issues related to public health. “That said, based on what we know today, I think we will see the employment picture turn negative, but it is doubtful that the impact on growth and the number of jobs lost would be as severe as the Great Recession.”

The way the situation looks today, he continues, the main impact on jobs would come from:

• Any industry connected to travel is likely to be hit fairly hard. The leisure and hospitality sector, restaurants, movie theatres and other public entertainment spaces will likely face a significant impact in the short term.
• Manufacturing and trade, due to reduced trade with Asia, Europe and (to a lesser extent) other parts of the world.
• The energy industry as demand diminishes and prices fall, and we likely see a cutback in things such as fracking and exploration.
• Ancillary effects of the cancellation of public events, such as schools and businesses operating remotely.

The extent to which these elements create job losses depends to a large degree on how long concern over getting infected remains central to public health and how broadly the virus spreads around the world, he says.

“The way things look now, I’d say we should expect job growth to turn negative for the first time in a decade,” according to Fiorilla. “A few days ago, I would have said that the better recession comparison is not 2008 but 2001, when the 9/11 attacks shut down travel and economic activity for a short time and the economy recovered relatively quickly.

“It would be foolish of me to guess how long the extreme measures to keep people home will last. The extent to which these elements create job losses depends to a large degree on how long concern over getting infected remains central to public health and how broadly the virus spreads around the world.”

If the virus spreads more than it appears it will at this point in time and has a deeper impact on the global economy than it now appears, job losses could be severe. “Given that, it makes sense for real estate firms to be cautious and plan around any eventuality.”

Fiorilla and Mark Stelzner, assistant professor of economics at Connecticut College, notes that the degree to which the economy suffers after the coronavirus is contained is a function of government response.

In recent days there has been significant action on that front. On Friday President Trump declared a national emergency over the coronavirus to free up $50 billion in federal aid. Also, on Saturday the House of Representatives passed a bill aimed at stemming the economic fallout from the coronavirus. Among other measures, it would expand the existing family and medical leave program for companies with fewer than 500 employees, establish a new paid sick leave program and provide additional funds to states that experience a 10% increase in unemployment. On Sunday, the Federal Reserve cut its benchmark interest rate by a full percentage point to almost zero and pledged a return to quantitative easing via the purchase of at least $700 billion in Treasury and mortgage bonds in response to continued economic fallout tied to the coronavirus.

The president has also been calling for a reduction in payroll taxes. While there is little bipartisan support for the measure, it does appear to be on the table.

Stelzner notes that there are a number of studies that show that decreasing taxes have a smaller multiplier effect than increasing government spending. “Also, the payroll tax funds social security. Thus, defunding it to respond to a crisis could set the stage for future acts on the system,” he said.