Founder, CEO of Blue Lake Capital LLC. Helps passive investors grow wealth through real estate. Podcast Host: Ready2Scale. Mentor.
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Back in early April, a few months after the World Health Organization listed the coronavirus (Covid-19) pandemic “a public health emergency of international concern,” I predicted in a Forbes article I wrote that there would be a serious downturn in the economy. Recently, financial experts agreed that the recession in the U.S. began in February and indicated that the recession could continue until Covid-19 is under control.
Despite many states ending restrictions on businesses and removing stay-at-home orders, the economy is still hurting. At the lowest point of the Great Recession, which lasted from 2008 until June of 2009, the Dow fell a total of 53.8% from its peak in October 2007. That drop was worse than any other market decline since the Great Depression of 1929. Fortunately, the current recession is different.
Predictions On Recovery
Unlike the Great Recession of 2008, which originated in the financial markets, the current recession was caused by a global pandemic; before the pandemic hit, business owners were optimistic about the economy, and the U.S. boasted its lowest unemployment rate in 50 years. The projections of the current global recession represent the worst decline since World War II; however, experts predict that it will be one of the shortest recessions on record. A great deal depends on when the U.S. can get Covid-19 under control.
Like many experts predicted when Covid-19 began, I thought we’d have a relatively quick recovery — a V-shaped recovery, with a steep drop followed by a sharp, fast recovery. Nobody, however, could have predicted just how damaging the pandemic would become to our economy as businesses closed and stay-at-home orders went into effect. Now, I believe the economic recovery will take on more of a U shape due to the length of time the economy has been shut down, which has already been far longer than I had originally anticipated.
Unfortunately, many businesses that might have survived a short-term closure won’t survive a longer one. Despite the fact that some cities and states have reopened, many businesses are not able to return to normal due to restrictions on capacity. There is also the risk of a second wave if cities and states open too early, and we are already seeing states reversing course on reopening measures.
The restaurant industry was hit particularly hard, and predictions on the percentage of restaurants that will permanently close have ranged from 40% to 75%. On top of the pandemic, in recent months, businesses and restaurants were looted across the country, and this damage could prove to be the final nail in the coffin for some small businesses.
The Multifamily Market
While some businesses will close and recovery will take longer than anticipated, tenants who have lost their jobs have been receiving unemployment funds and stimulus checks and states have dedicated programs in place for those in need. The reality is that unemployment benefits won’t last forever, though, and nobody knows how many more stimulus checks the government is going to send out.
Many businesses took advantage of loans through the Paycheck Protection Program (PPP), which offers loan forgiveness for businesses that maintain their original number of employees and payroll. The loan program covers up to two and a half months of payroll, and the loan proceeds can also be used for rent, mortgage interest and utility costs.
The PPP has helped many employees stay employed, which means the program has contributed to tenants being able to meet their rents. Collections at multifamily properties have remained strong, with 94% of apartment households across the country making full or partial rent payments, according to The National Multifamily Housing Council. Even though there has been a decline in collections as compared to the same months in 2019, it was a small one.
As the summer of 2020 draws to an end, I predict we will see a greater impact on rent collections because as tenants who have lost jobs will no longer be receiving the extra $600 in weekly unemployment benefits after the week of July 31, additional stimulus checks are not currently forthcoming and more businesses will likely declare bankruptcy. It takes time for new businesses to emerge and offer jobs.
This might not be as long of a recovery as we saw in 2008-2009, thanks to a strong economy and banking sector prior to the onset of Covid-19. In addition, the government is pumping large amounts of money into the economy, with more planned to help states and municipalities recover from the impacts of the pandemic. If a vaccine can be found and distributed within the next 12 months, I expect to see a recovery within the next 18 months. The faster we can beat Covid-19, the faster recovery will be.
In Summary
The current recession caused by the Covid-19 pandemic is far different from the Great Recession, due in large part to the fact that the 2008 recession was caused by poorly managed financial markets. While I originally felt we would have a V-shaped recovery, I am now of the opinion that we will see more of a U-shaped recovery, which will take longer to resolve. Nobody, including myself, could have foreseen the magnitude of the effects that the pandemic would have on our country and our economy.
Multifamily markets are still doing relatively well, with rent collections hovering around 94% in June. As more workers lose their jobs due to business closures, it follows that more tenants will be unable to pay their rents. No new stimulus packages have been passed, although several have been proposed.
While many states enacted “no eviction” rules during the height of the stay-at-home orders, many are due to expire, with unclear resolution as to whether they will be extended or not. Because of this, it is difficult to predict how tenants will fare in the coming months. The sooner the U.S. can distribute a vaccine, the sooner we will see recovery.
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