The Corona Hangover
‘Hey Boss, I don’t think I can make it in to work today?’
‘Really? I’m sorry to hear that. Not feeling well?’
‘Uh, ya. Too much Corona.’
‘Wow. That’s a pretty bad hangover for Corona. How many did you have?’
‘Uh, 19…’
The Hangover
Sorry for the corny joke, but I think you understand what I am talking about –– our economy has a hangover and the reason was too much Corona.
As we move towards re-opening our businesses, it feels a little like the moments after a bad storm blows through and we all cautiously emerge afterward to assess the damage –– Everyone ok? What got destroyed?? Where is my shed?!?!
The immediate bounce-back is unrealistic –– but housing will emerge largely unscathed.
Terrible analogies aside, the question that is now on everyone’s mind as we attempt to restart everything is –– ‘What is the true level of damage and how long will it take to fix it?’
My contention is that the economy is worse shape than we want to admit to ourselves and the immediate bounce-back is unrealistic –– but housing will emerge largely unscathed.
Let’s look at why.
The Biological Behavioral Change
In the previous two recessions (1987 and 2008), the economy collapsed rather suddenly because of excesses in the banking and financial systems ––and NOT because a virus forced it to.
By the end of both previous cycles (just before both crashes), fraud was rampant, underwriting was non-existent, and enforcement was nil. In other words, the roots of both the 1987 and 2008 recessions can be found in the FINANCIAL behaviors of the preceding years.
As we emerge from the COVID crash, we will also see some changes –– but they will come from the bottom-up and not the top-down.
In the years following both ’87 and ’08, legislation was introduced in order to address the causes of the collapse. The new laws were aimed at a select group of individuals (Wall Street bankers, mostly) in order to prevent the systemic abuses that caused all of the trouble.
Behavioral Changes, Not Legislative Reform
As we emerge from the COVID crash, we will also see some changes –– but they will come from the bottom-up and not the top-down.
Unlike ’87 and ’08, we won’t see legislation targeting fraudulent financial behaviors –– what we will see in 2020 is consumer/worker preferences change as each of us decides how we want to live our lives going forward.
That is a huge difference.
Dodd-Frank and the formation of the CFPB were the direct results of 2008; masks and social distancing are the results of 2020 –– and the two could not be more different.
And for those reasons, it will take a while to reset everything as our new behaviors are only now beginning to be understood.
De-Densification
Yes, that is a made-up word –– but I think we all know what it means. It means we want/need/prefer to spread out a bit.
In the intermediate-term, it means 6’ between one another and no more than 10 people in a group. But over the longer term, it will likely mean that restaurant maximum occupancies will decrease, concerts and sporting events will be allowed fewer attendees, the space between cubicles will increase, and far more telecommuting than before.
When 2008 ended, did you care about how close you sat to someone?
Of course not.
When 2008 ended, did you care about how close you sat to someone? Of course not.
But what about now? I’ll bet you do.
Do you still feel the same way about personal space? Nope.
Are you cool with crowds? Not really.
Will you ride the bus? Or go to a party? Or eat at a buffet? Doubtful.
Or would you even go so far as to change jobs due to your employer’s policy on office space? Perhaps.
Everyone has an opinion, but the new normal sure looks different than the old one.
Risk Tolerance Has Changed
I get it, we all have an opinion as to how people feel (or should feel) –– but no one really knows for sure.
For everyone who is chomping at the bit to go back to their favorite restaurant and get back to their desk, someone else is actually enjoying working from the home office and won’t set foot in a restaurant, bar, club, stadium, plane, coliseum, bus, office, hotel, Disney World, or Italy until at least two more flu seasons have come and gone without a recurrence.
Just because many venues have reopened, it doesn’t mean people will go.
Robots and Travel
In the mid-1980s, we began to see the introduction of robotics into automobile assembly in Detroit –– and it was ugly.
The unions fought it, management didn’t understand how to best apply it, and the pubic feared it.
The travel industry (business and leisure) accounted for 330 MILLION jobs worldwide (or 1 of every 10 jobs.)
Yet, despite the best efforts of the unions, automation took hold and is now the norm for almost any manufacturing process worldwide, not just the cars built domestically.
Zoom is a Robot
Now –– close your eyes and imagine that instead of robots and Detroit, think of Zoom and business travel.
The travel industry (business and leisure) accounted for 330 MILLION jobs worldwide (or 1 of every 10 jobs.)
And just so you realize, air traffic is down 95% and hotels are operating at 30-40% of pre-Corona occupancy.
Talk about ugly.
The average business trip costs +/- $1,000 between airfare, food, and lodging –– yet the most expensive Zoom package is $20/mo per host.
Is a face-to-face meeting more effective than a Zoom call? Yeah, probably.
But is a face-to-face meeting 50X more effective than a Zoom call? Not even close.
When savings are low, margins thin, and the fear of economic calamity is still freshly etched in the psyche, dropping $1,000 to go see a prospect feels reckless when a $20/mo option exists.
Am I predicting that all travel will cease forever? No, of course not.
But it is reasonable to imagine that travel, in all forms, will be down 50% for several years and 10-15% for far longer? I don’t think that is a stretch.
Retail and Restaurants
When Virginia Center Commons was recently sold to a developer to repurpose the land into a more residential use, I think the only surprise was ‘why did that take so long?’ VCC’s painful and public decline is decades old.
And when BizSense reported that the Stony Point Fashion Mall was in foreclosure, no one was really surprised. The Stony Point decline has also been evident for some time now.
But when Nordstoms announced it was closing at Short Pump, I think everyone was caught off guard. Wait, WHAT?!? NORDSTROMS?!? Nooooooooooooo!!!!!!
Retail space demand was already in shrinking (thanks, Amazon) and thus Corona probably didn’t change the outcome as much as it just accelerated it, but Nordstoms closing made retail’s decline feel real and sudden.
How in the world can they (restaurants) possibly make the rent payments at their current levels?
They can’t.
Restaurant Space is Retail Space
Nordstoms aside, nothing about the collapse of retail should be unanticipated.
However –– any mall, any strip center, and any urban shopping district is also ripe with restaurant space. On the block we occupy (2300 West Main St RVA,) there are literally 6 that I can see from our door. And within a few blocks, you can easily walk to another 20 or so?
So now look into the future –– if restaurants are going to be subject to additional cleaning requirements (higher expense), fewer workers (wage increases), lower maximum occupancy (reduced potential revenues) and lower demand for some period of time (lower actual revenues) –– how in the world can they possibly make the same rent payments as pre-Corona?
They can’t.
The amount of collective value that the dining scene provides to property owners AND the local governments is tremendous –– and it is going to go down and stay down for some time.
Do the restaurants reset at 50% of their pre-COVID levels? 70%? 90%? No one knows exactly –– but it’s not going to be 100%, that’s for sure.
The loss of restaurant revenue is going to be significant and the trickle-up effect is going to not only impact property owners but City Hall, too –– and that is a problem for everyone.
Housing and RVA
So what does this mean for housing, and specifically housing in RVA?
Despite the problems listed above, I don’t foresee much of an issue in the short term and I even see a benefit to Richmond in the long term.
Really?!? Yes.
The last blog talked about why the housing market has been largely unaffected by the COVID upheaval.
The bottom line is that the constrained supply side had artificially driven down the transactional volume. The number of buyers was anywhere from 10 to 25% higher than the number of available homes, and thus, when buyers were removed from the market by COVID, the impact was minimal.
And, moving forward, Richmond has far less exposure to the highly affected industries than other markets do.
Let’s discuss.
Travel
First, Richmond is less susceptible to the travel economy.
Yes, we have our fair share of visitors, but nothing like, say, New York, Orlando, DC, Vegas, or other cities with fully developed segments of their economies dependent on tourism. Nothing against Hollywood Cemetary or the VMFA, but Richmond’s tourist scene can’t compete with the Smithsonian, Redskins/Nationals/Wizards/Capitals, the Reflecting Pool, Kenedy Center, and the Washington Monument.
Richmond simply does not have the same size service sector that larger metros do and thus, the loss of tourism will be minimally impactful on our region.
Afforability
Second, Richmond’s affordability index is quite strong.
It takes a median salary of $54k to own the median house in Richmond
- It takes $88K in DC
- It takes $98 in NYC
- It even takes $58K in Raleigh
As the corporate world learns that Zoom allows for high-quality remote work, and the employees learn that they can Zoom in lieu of ride the subway and/or sit in traffic on I95, will the large metropolitan areas maintain their appeal?
For some, yes. But for some others, no.
Richmond provides a lot of value and access for far less than the other cities along the congested and dense northeast corridor.
I think we will pick up some population that is exiting the density and traffic-laden NE core.
Supply
Lastly, Richmond’s housing market was not overbuilt as it was in 2008. As a matter of fact, it is the exact opposite.
I cannot stress this enough –– we were already at record lows in inventory when Corona hit. Even with a 10 to 15% decrease in the buyer pool, we still didn’t have enough houses to go around.
So when you couple the already low inventory with sellers who decided not to sell because they don’t want infected buyers in their home –– we find ourselves at crisis levels (although is there such a thing as a good crisis?).
In 2008, there were somewhere between 4 and 5X the number of homes available as today and thus prices plummeted when demand dried up.
In 2020, we entered the Corona crisis with a housing shortage that has only gotten worse due to sellers staying put.
I don’t see an imminent crash in residential values, nor do I see all of the ugliness that accompanies it –– and while I would love to have more homes to sell, too many to sell is far worse.
Transitions = Transactions
So when someone moves away from NY, they have to move to somewhere else –– and that means as many as 4 transactions for the system.
The lack of supply and the price gains in recent years left housing oddly prepared for this moment.
When someone moves from DC, they have to move to somewhere else –– and that means as many as 4 transactions for the system.
When someone decides to buy a home with a home office because they no longer have to commute, that means as many as 4 transactions for the system.
When tenants decide they need more social distancing than an apartment will allow, it means a transaction for the system.
When someone decides to buy a home at the river vs. vacationing in Italy, it means a transaction for the system.
You get the picture.
Market shakeups benefit the brokers –– regardless of the industry –– and COVID is a shakeup unlike any other.
COVID will change our relationship with many things and housing is one of the primary beneficiaries.
Summary
This post could have been far longer.
We didn’t dive into office and co-working space, the oil markets, suburban vs. urban homebuilding, interest rates, lending standards, the election, or the pending deficit that will cause taxes to skyrocket.
Each of those topics could easily have been its own post.
But the bottom line is I don’t think that the hoped-for bounce back will magically appear and life will return to normal by September. I hope I am wrong, but I believe the Corona hangover is real and many market segments have to adapt to the new normal –– which is still, as of yet, not fully understood and will take some time.
The lack of supply and the price gains in recent years left housing oddly prepared for this moment.
But, at least for my agent peers, it seems that this hangover will not be a residential one, it won’t be a homebuilding one, and it will not be a Richmond one –– at least not in the same way that Vegas, NY, and Orlando will likely feel it. People will change their housing and their geography –– and that bodes well for transactional volume and cities like ours.
This is not to say that residential will not be impacted whatsoever –– it will. Any time you have unemployment approaching 20%, businesses closing, and massive stimulus, there are 2nd and 3rd order impacts. Some changes we can easily envision, others are still yet to rear their ugly heads.
But, at least for now, it feels as if the residential market has proven to be far more robust than it was in 2008. The lack of supply and the price gains in recent years left housing oddly prepared for this moment.
And that is a good thing.