Much of the analysis regarding the coronavirus impact — including ours at Cushman & Wakefield — has understandably been focused on the negative impact of the outbreak and downside scenarios. The situation is fluid, and there remain many unknowns. However, to inject a little bit of optimism and to help provide perspective, we offer five “glass half full” observations:
#1. “The stock market has predicted nine out of the last five recessions.” – Paul Samuelson, Nobel Prize winning economist
The financial markets are important, and there are certainly strong links to the broader economy. That said, the stock market has not historically been a very reliable predictor of recessions. There have been five stock market corrections (S&P 500 down 10% or more) in the current U.S. economic expansion before the current one and none of them has precipitated a recession. Moreover, commercial real estate (CRE) is not the stock market. The leasing fundamentals are slower moving and do not shift wildly based on day-to-day stock price movements.
#2. Falling oil prices have never caused a U.S. recession. Never.
Oil prices have been falling since the beginning of the year, a decline that has accelerated since mid-February. The West Texas Intermediate, the U.S. oil benchmark, has dropped from $63 per barrel in late December to ~$30 per barrel (first week in March 2020). Saudi Arabia and Russia were not able to reach an agreement to cut oil production. In fact, Saudi Arabia has signaled it will increase oil production, which sent oil prices down sharply. Falling oil prices create economic pain in oil-producing nations and cities, but they are typically a net positive for the global economy, as it leads to cheaper prices at the pump. For example, in the mid-1980s, when oil prices plunged, U.S. real GDP grew by ~4% per annum. In 2015, the last oil price correction, U.S. GDP grew by 2.9%. According to Moody’s Analytics, every penny decline in gas prices allows consumers to redirect $1.1 billion in spending over the course of a year. However, COVID-19 will likely keep more people at home, and the boost in consumer spending will likely not be as significant in the near-term.
#3. Property shines during periods of volatility.
Certainly, there are downside risks, and we continue to monitor the coronavirus impact on the CRE economy, which at this stage, is unknowable. But from an investor’s perspective, there is a lot to like — the 10-year Treasury yield has fallen below 1.0% for the first time in history, a record low. The cost of capital is cheaper than ever, leveraged returns are now the best in 20+ years, and based on the data that we do have, we still have strong underlying economic fundamentals, with more fiscal and monetary stimulus likely to be injected.
#4. All real estate is intensely local, but in the aggregate, property fundamentals are still in good shape.
Granted, it’s too early to draw firm conclusions, but as of March 10, there is no evidence that leasing fundamentals are faltering. In the U.S., office vacancy is ~13%, and it’s even lower in Europe. Vacancy is rising in Asia Pacific, but that trend began to form before the coronavirus outbreak began. China is in the midst of a supply boom. There is no data available that suggests the industrial logistics boom isn’t continuing. Industrial vacancy remains at an all-time low. U.S. investment sales were down slightly in January of 2020 (-4% y/y), but still healthy. All of that said, CRE data is generally tracked quarterly, so we won’t know until more data rolls in.
#5. Labor markets remain in excellent shape.
In the most recent report from the Bureau of Labor Statistics (BLS), the U.S. economy created 273,000 jobs. Unemployment remained at a 50-year low. Granted, this is a backward-looking measure, but it is in fact the most recent data point on job growth in the U.S.
What to Watch: Jobless claims and unemployment.
If the U.S. economy was truly in trouble, it would likely show up in the jobless claims data first, which is released every Thursday. We would see an increase in the number of people applying for unemployment benefits. The COVID-19 outbreak doesn’t appear to be impacting the labor markets yet. In fact, in the most recent reading — the week ending February 29, 2020 — jobless claims fell by 3,000 to 216,000. Jobless claims are currently at a 50-year low. Unemployment is another measure to watch. A rise in the unemployment rate could lead to more pessimism about the economy and to a self-fulfilling prophecy. But, if the claims and unemployment data remain near current levels, that will be a very strong positive sign.
RESEARCH CONTACTS
Kevin Thorpe
Chief Economist,
Global Head of Research
kevin.thorpe@cushwake.com
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Rebecca Rockey
Economist,
Global Head of Forecasting
rebecca.rockey@cushwake.com
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Ken McCarthy
Economist
Americas Head of Applied Research
ken.mccarthy@cushwake.com
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