It’s been a rough month and a half for planet Earth, but there are signs of hope. China is returning to normal life as Italy and Spain begin to ease COVID-19 restrictions. The U.S. — the country with most coronavirus-related casualties so far — isn’t at the point of reopening yet, but there are early indications it isn’t far behind. The curve is continuing to flatten — even in hotspots like New York, where Gov. Cuomo announced on April 13 that “it appears we have a plateau.”
The COVID-19 infection rate may be slowing, but that doesn’t mean our problems are over. Like much of the world, the U.S. economy has been at a near-standstill for weeks, leading nearly 17 million American workers (or about 11 percent of the labor force) to file for unemployment.
“This is the first time I’ve ever witnessed an entirely agnostic event,” says Rick Chichester, president and CEO of Irvine, Calif.-based Faris Lee Investments “It’s not hitting a certain set of people or a geography or a usage. It’s across the board.”
Returning to a New Normal
With talks of a flattened curve and battered economy, we are left wondering when, exactly, the country will be able to reopen — and what that post-coronavirus world looks like.
“I think it’s very optimistic to hope we can reopen in May,” Chichester continues. “At a minimum, I think it’s going to be a rolling opening. I don’t believe we can have three months off, flip the light switch and just get back to normal. You’re going to see an elastic expansion-contraction where businesses will open, contract a bit and slowly open more over the next 18 to 24 months.”
According to Chichester, people have been spooked. Regardless of whether people view themselves as patients, workers, citizens, observers, part of or apart from any certain belief or political system, the result is that many don’t view the world — or the people in it — the way they used to.
“We have to be cautious and reasonable when it comes to reopening businesses,” he continues. “If we’re not, we’re probably doomed to repeat this, and we won’t get to a point where we have the confidence to say ‘We have control of this issue.’”
Chichester believes the general public will be impacted by the coronavirus in several ways. We will see a social change where people re-examine where they go, how often, whether they want to eat in restaurants and how close they’re willing to sit in proximity to others.
We have already seen a change in consumer confidence as Americans watch their retirement accounts and investment portfolios fluctuate wildly. Job losses continue to mount and most retail businesses remain closed.
“At least 17 million peopled have been terminated or furloughed, with another group of workers wondering if they’re next,” Chichester notes. “That’s going to moderate spending. Plus, with businesses being shut down, that further moderates everyone’s spending at a time when the government is trying to stimulate you by putting money in your pocket. We also have to remember that our economy is built on the fundamental premise of consumer confidence, and consumer confidence is waning.”
Then, there are the behavioral changes some may make to their lives and habits. It’s these changes — rooted in fear — that worry Chichester the most.
“Following the health issue, we need to move past the the potential shift to a pandemic of fear,” he explains. “It’s incumbent upon all of us to be very rational and very meaningful about what we’re going through and what it means so we don’t create another pandemic. You don’t want to see behavioral changes from a place of panic or fear. That fear could far outlast this virus. People start asking ‘Is it going to happen again?’ and ‘What do we do next time?’ This has an impact at multiple levels and changes how people look at consumption. It affects what they choose to spend their money on and what they don’t spend money on.”
Open for Business
The coronavirus may have impacted every strata of our daily lives, including the economy, workforce, businesses, healthcare and spending, but that doesn’t mean its impact is distributed equally. This is particularly true in commercial real estate.
Chichester believes that all property segments will be somewhat impacted, sometimes positively. “I think industrial will expand, especially logistics, thanks to the acceleration surrounding e-commerce and the internet. We have changed behaviors to get comfortable working from home and ordering deliveries. The acceptance of these new channels for distribution has caused rapid expansion in these fields, and a benefactor of that change is industrial.”
However, one sector’s gain tends to be another’s loss. Chichester isn’t quite as bullish on retail’s short-term outlook — at least, outside of discount and daily needs.
“The outcome of the last recession was a move toward experiences comprising restaurants, fitness, and cinemas,” he notes. “I question their near-term elasticity and resilience. In the long-term, they will be fine, but I’m curious to see how consumers respond when you consider likely behavioral and social changes. I’m not sure how fast consumers will go back to sit-down restaurants and being in densely populated environments where they’re sharing small spaces with lots of people.”
It may be easy to dismiss this notion, assuming only a minor percentage of the population may opt to remove themselves from dense scenarios like gyms, movie theaters and restaurants. Chichester would say you’re right, but he’d also say you may be underestimating just how large of an impact a small group can make on business.
“Even if only 5 to 10 percent of people make these behavioral changes that cause them not to go to these venues, this changes the economics of the real estate and its tenancies,” he says. “It doesn’t have to be a 90 percent shift. This small percentage changes everything.”
Still, the one fundamental fact of retail remains true. It’s all about location, location, location.
“The one commonality I’m committed to and confident in is that retail still occupies the best real estate in all communities, including secondary and tertiary markets,” Chichester explains. “It might mean some of that retail will become irrelevant quickly, but its location will allow it to move to an alternate use.”
Chichester also believes the retail industry will have to keep the lines of communication open throughout the chain if shopping centers and retailers plan to emerge from this with the least harm done. After all, what starts with the consumer soon impacts retailers and their landlords (plus those landlords’ lenders, lawyers, and insurance agencies), as well as the government.
“The one thing the government is doing is exactly what people intended it to do,” he says. “It’s our backstop and, in essence, our insurance policy.” Regardless of politics, “The government is doing what it’s supposed to do and sending a clear signal that it will do what it has to do. That will mean more quantitative easing and expanding stimulation. To what end? No one knows.”
So far, the Fed has cut interest rates to zero and provided an unprecedented $2.3 trillion in programs. This is in addition to a $350 billion small-business loan program that is set to receive another $250 billion once Congress can agree on the terms.
“The Federal Reserve has said it will do whatever it has to do with no limits,” Chichester adds. “Will it be enough to get us through this? It will be, because it has to be.”