The K-Shaped US Economic Recovery Theory and What It Means for CRE

An uneven economic recovery from the COVID-19 crash is increasing the divide between the haves and have-nots, and the rift will extend to the commercial real estate market, according to a new report.

The report explores how some economists’ theory that the country will see a “K-shaped” economic recovery might also create an unequal recovery in the office, retail and housing segments of the real estate industry.

This idea of a “K-shaped” recovery essentially means that the COVID-19 economy is showing that a rising tide does not raise all boats equally, said the report, “The case for a ‘K-shaped’ recovery?,” by Ryan Severino of JLL.

“Essentially, the concept rests on the idea that while the fortunes of some in the economy have nearly or fully recovered,” wrote Severino. “The fortunes of many are still declining, or at least failing to recover nearly as quickly.”

When it comes to commercial real estate, the office market may land on the “haves” side, with high-end office spaces doing better than low-quality offices, he wrote.

On the “have-nots” side, retailers and retail centers–especially the ones that cater to less-affluent households–may lag behind in their recoveries. Troubles may also await lower-income housing developments, in contrast to swelling demand for homeownership and other “high-barrier-to-entry housing,” the report said.

Why these divergences between different real estate areas, dependent on the income level of clientele that they target?

Severino wrote that the reason lies in the underlying economic recovery.

On one side, asset markets are rising and equity markets have largely recovered. Fixed-income markets and housing prices are looking good. But who benefits from this? The affluent.

Most households don’t own stocks or bonds, only half have retirement accounts, and just two-thirds own their homes, explained the report. They don’t benefit from the asset-market recovery.

The same type of inequality extends to the job market. Lower-skilled workers lost their jobs disproportionately as government shutdowns harmed businesses in the retail and restaurant sectors, and frightened consumers quit shopping and dining out. Some parts of the labor market are recovering, but not for these retail and restaurant workers.

“According to an Ipsos poll, 80% of employees that were temporarily laid off thought that they would get rehired, but so far only 42% have been rehired,” the report said.

In contrast, higher-wage workers fared much better. Job losses aren’t as significant for office workers in financial, professional or business service sectors. They’re able to work from home well, and so employers’ demand for these jobs is steady or even increasing a little, said the report.

The growing rift between those faring best and those faring worst will be reflected in the commercial real estate market.

The segments that cater to higher-income people or companies, whether in office, retail or housing real estate, are going to do better. The future may not be as bright for commercial real estate in the lower-end office markets or less-affluent retail and housing categories, wrote Severino.