A bit of cheer to start
the new year
Increasing vaccinations, $900B stimulus and robust markets deliver hope for commercial real estate
>> Quick takes:
- Senate approves next relief package
- Vaccination program begins
- Markets sparkle despite pandemic
- Economic challenges concentrated in next six months
- Recent developments deliver hope for CRE
As we welcome 2021 and the return of our economic insights, we find ourselves in a similar position to when we last wrote in mid-December – with positive and negative developments grappling to determine the short-term path of the economy over the next six months. While this remains the most uncertain period for the near future, the recent good news provides some cheer for an improved outlook despite continued uncertainty.
Senate delivers a present
Just in time for Christmas, the Senate passed another relief package totaling roughly $900 billion. The deal took months to negotiate and finalize. And though the final total came in below what many had previously anticipated, it should provide needed relief and help prevent the economy from backsliding in early 2021. Though no panacea, the deal provides crucial support until widespread vaccination enables the economy to mount a more robust recovery. And it opens the door to additional aid packages if they prove necessary. The package includes several key provisions. It extends emergency unemployment benefits for roughly 14 million people until mid-March. It also extends eviction protection for renters through the end of January. The package also contains a $600 payment for some individuals, a $300 boost to unemployment benefits for 11 weeks, and roughly $280 billion to support small businesses. While the package did not include formal aid to state and local governments, the deal provides funding for vaccines, education, and transportation for use at the state and local levels.
Also arriving during the holidays, vaccinations began to occur in the U.S. Although the pace of vaccination thus far has fallen below earlier projections, any vaccination gets us closer to herd immunity and a full recovery in the economy. We now have two approved vaccines with distribution and administration ongoing. While the slow pace of vaccination poses some downside risk to the outlook, we still see this development as a significant net positive. And the effect will become cumulative over time – as more people get vaccinated, they will feel safer reengaging the economy. That should also enable those who have not yet received a vaccine to also feel more confident in engaging the economy, all else equal, as the number of people infected declines. Ultimately, vaccination provides a significant marginal benefit that will accumulate over time, even if the rollout continues to run into issues.
Markets also ended the year on a festive note. The S&P 500 grew by roughly 16% in 2020 despite the massive headwinds and challenges posed by the pandemic. And that includes the significant decline that occurred after the initial onset of lockdowns and shutdowns earlier in the year. Although markets benefitted from both monetary and fiscal support, markets are clearly also looking ahead to brighter times, even if markets are not the economy. Widespread vaccination will almost certainly unleash pent-up demand for goods and especially services starting in the latter half of 2021 once widespread immunity has occurred which should benefit businesses, including publicly traded corporations.
Some bah humbug
But the economy has not reached clear sledding yet. The pandemic continues to set new records across a broad swath of metrics such as infections and hospitalizations that have resulted in both supply-side impacts (via more-stringent shutdowns and lockdowns) and demand side impacts (via people avoiding activities) on the recovery. We see that in the continued loss of economic momentum after the snap-back third quarter. Although we did not expect the economy to maintain that rate of recovery, the worsening pandemic has unequivocally slowed the pace. This shows through most clearly in the labor market. Unemployment claims continue to remain elevated, with initial weekly jobless claims stuck in a narrow range between 700,000 and 900,000 since late August. Continued claims remain elevated as well and even their decline looks only slightly hopeful because a significant part of the decline occurred because some people exhausted their full benefits. We expect at least a few more bumps before the ride smooths out.
| What we are watching this week |
Reflecting this dynamic, unemployment claims for the last week of 2020 should remain at elevated levels due to ongoing damage to the labor market produced by the resurgent pandemic. Accordingly, we expect another downshift in the employment situation for December following November’s deceleration. We expect net job gains to remain lightly positive but come in well below the pace of recovery from the summer or even autumn. We see little change in the unemployment rate and hours worked per week while wages should tick slightly higher. We anticipate that both the ISM manufacturing and nonmanufacturing indexes for December will remain squarely above 50, signaling continued expansion of economic activity as the recovery continues.
| What it means for CRE |
For commercial real estate (CRE), recent events portend better times ahead, even if not all sectors benefit immediately or equally. Putting cash into the pockets of consumers most immediately supports industrial via continued increased usage of ecommerce, and multi-housing. For office and hotel, vaccination offers the best hope for a return of people to those physical spaces. This should take somewhat longer to happen but expect a gradual improvement over time as more and more people get vaccinated, culminating in a broad (if not full) return by the latter stages of the year. For retail, the recent aid package should provide some support despite many consumers still largely shunning physical retail centers while vaccination should enable the return of consumers to all subtypes of retail formats, particularly discretionary retail.
| Thought of the week |
According to research, roughly 20% of all charitable donations occur within the last two days of a calendar year.