I am not a pessimist; I am a realist or at least I tell myself this all the time.  I am not afraid to look at a situation and see the worst-case scenario as well as the best-case scenario, do some cranial connect the dots and move in the right direction.    Often times in an entrepreneur’s journey, it takes heaps of wishful thinking and blind optimism to get through a project and life successfully, and this situation is no different.

As Covid-19 approached over the last couple weeks, the writing on the wall once the blind panic began with the runs on toilet paper.  People and then soon after government were overreacting, panicking, and creating a toxic environment of fear-based decisions.  A response was required, whether or not this was the correct one will be debated for years to come and not the purpose of this article.  One thing is clear, we are sacrificing a lot to save a few, and we will never know for sure if it worked or if was an overreaction.

I believe the effect of shutting down our economy for a few weeks, let alone months, has begun a toppling effect on multiple economic systems that will take a decade to fully complete. It will reshape governmental policies for decades, will change society as we know it for future generations.  We will be entering into the doom and gloom scenario they warned us was coming after the mortgage crisis over 10 years ago.   The Covid-19 disaster is the event that stops the can from being kicked down the road any further.  The effects of this shut down will & has already crushed the Travel & Tourism industry, the Oil & gas industry, Auto Industry and of course the Housing Market as well.

As I am not a professional research writer nor academic, you will just have to trust your author has pulled numbers from credible sources as I do not have the time for a properly cited article in order to make the editorial cut off for the month.   I have no interest in scaring anyone with fake statistics nor have any ill intentions, so you will have trust me on my numbers.

If you want to just read the analysis of the coming real estate market cycle as a result of massive job losses based on my analysis in the first part of the article, click here.

These are the catalyst to the coming recession, great recession or depression. Whatever the media, government or academics decide to call it in the end, they get to decide what to call the coming economic downturn. Despite popular belief there is no predefined definition of “Depression” it is a subjective term.

Travel & Tourism Industry: 10 Million Jobs on the Line

The first industry to already feel the effects of Covid-19 was the Travel & Tourism industry.  The very nature of the industry makes it extraordinary vulnerable to pandemics as it’s the first that needs to be shut down to contain a contagious disease from spreading country to county, state to state.  Cruise ships & planes are floating petri dishes cramming people in close quarters sharing breaths and surfaces to extreme degrees.  Without people flying and traveling there is no demand for hotels, casinos or other tourist destinations.  

Travel agents in my various social circles have been complaining of people canceling over a year’s worth of booking as this crisis worsened.  This much uncertainty about the safety of travel, has decimated the Travel Industry and it will take the hardest hit immediately.

Hotel Industry: 2.3 Million Jobs on the Line

The need for hotels will always be there, but with a major downturn in travel and leisure worldwide during and after Covid-19 outbreak, hotels will be shedding expansion plans and employees for the foreseeable future.   With events like sporting, business conventions, casinos and other theme park destination making up a large part ofc bookings, they have already lost months’ worth of reserved bookings since the outbreak began.  Many of these hotels have insurance for these types of scenarios and it will add pressure on insurers as well if they are forced to pay on all these claims no one could have ever planned for.  

It’s not hard to imagine hotels that are heavily leveraged and have large operating expenses will need to get “lean and mean” in order to survive.  The hotels that survive will need to make cuts to staff temporarily at least until this lockdown has run its course and the planet gets back on its feet.  Imagine how many employees in the hotel industry simply have nothing to do if the hotel is empty.  No need for maids, launderers, drivers, guest services, valet, concierge, maintenance crews to handle guests and their messes, nor chefs, waiters and bartenders to serve at the hotel restaurants, bars and room service.  The bulk of their workforce would be idle save a few like landscapers and perhaps middle and executive management and some marketing.   

Short term they are beginning to lay off their entire service staff.  Could they lay off a million or more worker for at least a few months?   Absolutely, there will be major layoffs announced shortly and some of these hotels simply won’t have the cash reserves, or the credit at the end of this natural disaster to survive.

Airline Industry: 621,000 jobs Jobs on the Line 

Airlines have shut down for the most part as over 75% of flights have been canceled on most major airlines since the outbreak has begun in earnest.  Before the outbreak the airline companies have historically required government bailouts and even in the best of times most of the airline companies were heavily leveraged and mortgaged to the hilt. It is hard to imagine most of these airlines surviving this shut down as many barely made ends meet in a normal travel market.  To that end airlines have tried to keep demand strong leading up to the travel bans by slashing prices.  Tickets to Europe were slashed from $1,200 to $200.  Domestic US flights had and still have prices cut 50% to 75% of a normal ticket price.  

US based Airlines have already announced layoffs of 20% to 40% of their workforce.  Airlines have their hands out for a bailout, but even with bailouts only the strongest airlines will survive, the others will simply go away leaving behind massive job losses and unpaid loans and bankruptcies.  On the positive side due to ongoing low cost air fuel thanks to the oil & gas market meltdown (more on this later), their operating margins will improve.

Cruise industry 400,000 Jobs on the Line

Cruise ships are toxic fish bowls of germs and filth, people are now keenly aware of this.  The idea of taking a cruise after everything that has and will occur with the new pandemic fears will forever change this industry.  These cruise ship businesses are not U.S. based companies and routinely skirt US safety laws including those meant to protect the health of its passengers.  As a result of the Covid-19 outbreak many of these ships were floating contamination nightmares and were not allowed to dock for days and weeks. 

Most of these companies will be laying off many employees if not all at least temporarily.  Maybe of these jobs will never come back as taking cruises will be out of fashion for years to come post Covid-19.  

Oil industry has 1.7 Million Jobs on the Line

The natural gas and oil industry employs 1.7 million in the US supports 10.3 million jobs and accounts for nearly 8% of the gross domestic product.   The sideshow to the Covid-19 economic stoppage has been an oil war between OPEC kingpin Saudi Arabia and non-OPEC leader Russia.  This price war has caused the price of oil to fall from $60 a barrel down to $20 today.   Drops of 50% in oil prices occurred overnight when the Saudis slashed their prices as a shot to their adversaries Russia.  OPEC has increased production further driving down prices as demand for gas from China plummeted following their Covid-19 shutdown. 

As the rest of the world self-quarantines the need for gas and oil products will be at levels not seen in 50 years or more, oil producers would normally be cutting their output to stabilize the oil prices, but because of this price war the opposite is happening.  The end result of this price war is that all the new energy producers, namely the Shale extraction companies here in the U.S. can no longer extract oil at a profit.  Most of the shale extraction companies begin to lose money at below $50 per barrel and the profit horizon is simply out of reach now for the foreseeable future between nearly zero demand for gas and the OPEC – Russia price war.  Many of these American oil extraction companies are leveraged to the hilt and the banks that hold the most of these debts have already been beaten heavily as defaults are coming with the wave of bankruptcies this is surely to create in this industry.

The doom: New US based shale extract and Oil industry companies will default on loans and go bankrupt.  It is easy to foresee 500,000+ jobs will be lost at least temporarily.  Loans will also be defaulted on, some of the smaller banks and lending companies cannot survive hits like this.

Banking Industry 1.5 Million Jobs on the Line

Unfortunately, once again I believe the banking sector will be hard hit.  It’s not just my opinion, Wall Street already cut the bank’s value down by 50% on average since the crisis began, and it will go even lower.   Banks are operating in a 0% fed interest rate environment, but are sitting behind  their cash motes preparing for waves of defaults from all the above industries on their commercial lending arms, and then due to mass layoffs it’s only a short amount of time before consumers cannot pay their mortgages, car loans, and credit card balances.  There is a giant credit fallout component that is just now being talked about due to Covid-19 disaster. Thanks to the increased reserve ratio rules, banks have to keep larger cash reserves on hand to stay ahead of the money it lends, but eventually in the face of the crisis I believe this government will waive this rule to loosen the credit market and get the banks to keep lending.  The “Too Big to Fail” rules and regulations will melt away and that’s bad.

Construction:  10 Million Jobs on the Line

When the economy is bad construction slows.  During the Great Recession a decade ago the construction industry lost 1.5 million jobs.  Less growth means less things are being built.  There will always be some level of government spending on infrastructure that will keep construction markets alive, but large chunks of the contraction industry go away when home builders stop building new communities and office buildings stop being erected.  Short term we can expect at least a 250,000 layoffs as new housing and commercial projects are canceled for the next 3 months.

Covid-19 Effect on Real Estate Markets

If the scenarios I have detailed above come to pass and it probably will, we are looking at somewhere around 5 million jobs that would be lost in the first 6 months of this natural disaster.  Some will be temporary layoffs, but many will not.  With all these industries being crushed by this disaster, the economic ripple effect will be felt in every industry that touches them.  Less companies will be using various support software, buying cars and equipment, less catering, less travel, less office space leases, less video production, less ads being purchased, less of everything.  A chunk of our economy will have withered and fallen off by the time America goes back to work.  When something flicks the economy on and off like a glitchy computer, there are going be some long-term effects. Things will not switch back on as if nothing has occurred and ever be like it was before.

In the near future Unemployment will easily jump to 10% and to 20%, due to everyone basically being temporarily laid off. What happens to investor confidence with unemployment numbers at eye popping levels never seems since the Great Depression of the 1930s?  Not just stock investors, property investors’ confidence will tumble, prices will tumble.  What happens when people lose their jobs and can’t pay their mortgages?  Foreclosures.  Lots of them.  Banks can only hold on to empty houses for so long post foreclosure.  There will be an initial surge of houses on the market after this crisis.  People recognizing the housing market isn’t climbing anymore will want to try and sell at the peak to get the most for their property.  Many will need to sell as they are laid off or are relocating for new jobs in other markets.   A surge of inventory is coming over the next 1 to 2 years and it will take years for the market to work it all out.  There are banks still holding inventory from the Great Recession and it’s been nearly 10 years since then.

 A buyer’s market at least on the order of the Great Recession if not even greater.   Governments will step in to try and mitigate the foreclosures and excess inventories, but it only has so many fingers to cram into the dike for so long.  Banks are going to be taking huge hits, homeowners are going to watch their equity vanish almost overnight.  All of our markets are going to enter a super cycle of fear, uncertainty and volatility.

Covid-19 effect on Commercial Real Estate

Retailers already on the precipice before Covid-19 will surely fall into abyss once people leave their homes even less post quarantine.  If there were shoppers not buying most of their goods and services online before, the outbreak is teaching them to do most of their shopping online now. Surely some of this new shopping trend will be part of their new shopping habits going forward.  Malls that were increasingly becoming nothing more than ghost towns before the outbreak surely will go away now as consumers see more reasons to avoid other shoppers.  

Businesses will quickly find out that many parts of their workforce will do just fine working from home, they don’t need to lease all that extra office space.  Commercial real estate is going to come tumbling down after it’s run up and doubtfully recover any time soon. 

Video conferencing Zoom, Logmein, Skype has allowed us to communicate in groups and have meetings face to face over the internet.  Remote employee monitoring like Timecamp and Hubstaff allows employers to watch employees as they work and log their productivity from anywhere. Remote file storage software services like Dropbox, OneDrive, and Google Drive allow teams to share and work on all company files from any location.  Productivity and project management software like Asana, BaseCamp, Trello, Monday.com, has allowed massive group collaborations without needing to be in the same physical space. 

Commercial Real Estate is dead, long live Digital Commercial Real Estate!

Covid-19 Effect on Multi Family Real Estate

From 2010 through 2020 we have seen a huge run on Multifamily prices.  Prices far eclipsed pre housing bubble levels in 2017 and kept climbing.  New multifamily housing builds have been at pre-bubble levels for the past 3 years.  Why is there such a huge price and build run on this real estate class?  Average monthly rents have increased steadily for years and so have occupancy rates.  These two factors plus exploding investor interest have led to the multifamily real estate boom.

There is only thing that can derail the multifamily money train, and that is falling rent prices and occupancy rates.  This downward spiral is exactly what is being setup by our economic shutdown. 

Mass layoffs from mothballed industries mean people can’t make rent, and even worse, there is now a moratorium in place for evicting nonpaying tenants.  The moratorium extensions for halting evictions has been floated for as long as 90 days in some parts of the county. 

 A disruption of rent collection on this level will surely sour many multifamily investors from increasing their holdings, even causing many deals in the pipeline to fall apart. 

There will be excess inventory on multifamily units as newer fearful investors talked into highly leveraged investments during weekend real estate boot camps rush for the exits.  Prices will be discounted as long as the economy is unstable and in recession or depression. 

Multifamily will come out the other of this economic downturn as a winner though. People always need a place to live, but how many years will it take for rent & occupancy to stabilize? The values and income production of these properties are going to come down in the near- and long-term future.  There are no models to predict bottoms here to signal buying but all the formulas taught in these weekend multifamily investor bootcamps need to go out the window now. 

Covid-19 Effect on Single Family Real Estate

When people lose their jobs and source of incomes, they lose their ability to pay their bills.  Mortgage default rates are going to climb.  The Government will try to prevent it from happening on a massive scale but in the end, there is just no way to stop them all forever.  

There will at first be excess inventory as all the current inventory sits unsold at their current pricing.  No homeowner is going to jump into buying a house while quarantined.  After the quarantine the news of layoffs and economic bloodletting will be well covered and there’s nothing like economic uncertainty to chase away home buyers. Even those that want to buy will know they will have the pick of all the properties that were in the  market before Covid-19 and all the new properties coming in from people that lost their job and others trying to sell before a perceived giant price drop to save their equity.  There is going to be a huge amount of inventory and very few buyers. That is just the first leg of inventory.  

The second leg of retail real estate will come with the first round of foreclosures in 6 months to a year from after the quarantine ends.  No matter what programs are out there, people are going to lose the ability to pay mortgages and they will need to be removed from the property.

No matter how badly the government, the banks, and the country want to stop people from losing their homes, it has to happen eventually if the mortgages go unpaid.   If there are no consequences for not paying your mortgage, then almost everyone will stop paying their mortgages regardless of their ability to do so. 

As in the previous housing crisis these foreclosures will start to go through quickly as the current court systems are built for speed post housing crisis of 2009, but that won’t last.  There will be waves of litigation, entire legal industries popping up for Covid-19 defenses and lawsuits.  Once again foreclosure will grind along for years to come and take at least 4 to 6 years to clear this new enormous glut of distressed property.   Loads and loads of inventory.  

Covid-19 Effect on AirBnB and Vrbo Properties

Immediately after the Covid-19 crisis began the first investors to see the coming tidal wave was those who are heavily invested in short term rentals using AirBnB and Vrbo.  For the past few years investing in short term rental has been a popular strategy of property investors and due to the nature of the business they are going to be hit particularly hard. 

Many of these properties were bought with valuations based on its short term rental rates.  When there is little to zero travel all of these properties are going to sit empty.  When news of the virus spreading hit, short term rental investors reported months’ worth of booking being canceled in a single day.  Only those that purchased these properties at proper valuations and have good cash reserves will be able to hold on to these properties.  The rest will scramble at fire sale rental rates to find any kind of tenant short or long term, many that are heavily mortgaged will default.

Short term rentals will still exist going forward, but it will take a long time for the rates to climb back to anything that would considered “profitable” in the long term.  The investors that bought based on a 2017 and above market value will be under water on their loans for a long time.

Covid-19’s Effect on the Credit Market & Mortgages

With the housing crisis a not so distant memory for banks many will hide behind their cash reserve moats in the coming months.  

Regulators will at first dangle carrots at them to loosen their restrictions and let the loans fly and, in the end, the only thing that will draw them out is to remove the very regulations that were put in place during the last housing crisis.  They will no longer be required to keep the same high level of cash reserves meant to prevent the “Too Big to Fail” scenarios that caused the last crisis.

The idea will seem insane and yet during what the government will call “emergency times” be deemed necessary to save the economy. Only then will the loans come back and even then, it will mostly be for commercial loans and not residential real estate mortgages. 

Residential retail mortgages will only be given to the people that need them the least. Those of us with 800+ credit scores, $200k or over incomes with giant cash reserves on deposit.  With few loans being made, housing prices will have little room to climb at all. 

What Should You Do in the Upcoming Bearish Real Estate Market?

Cash is king as always, especially when banks tighten their belt and distressed properties are the new norm.  You cannot try and only buy at the bottom because guessing the bottom is an impossible game.  An investor has to assume the recent melt up of rental prices will surely race down over the next few years.  Properties that rent now for $2500 per month now were renting for $1700 per month just 6 years ago.   I will be using this 6-year-old rent rate in my purchase formulas.  Of course, this means I won’t be seeing many deals until sellers realize they can’t sell for what their property was worth before the Covid-19 disaster.   Those who had the courage to buy properties in the face of the housing meltdown last time did pretty well for themselves and from my analysis many of them used similar calculations back then.

I move forward in my financial life with these points in mind. 

1.  We are entering another recession and it will probably worsen to something greater, a depression.  

2.  Real Estate just got the bottom pulled out from under it and many won’t realize this for a few months.

3. Purchase Single Family properties only if it’s at 2013 or less valuations and ideal for a rental.  

4. Commercial real estate is going to completely crash. Avoid it for now.

5. Multifamily will take time to find a bottom before rent and occupancy rates stabilize. Avoid new projects.

6. The foreclosures will keep coming like waves for the next 5 years starting in the next few months.  Teach everyone how to buy at the foreclosure auction.

7. Cash is king, hoard it for now.

The further we look into the crystal ball, the more depressing it becomes.  How can this event not create all the economic horrors described above?  What will the long-term psychological effects be from knowing the next pandemic can be around the corner and more severe next time.  Any headline about a new version of a virus can, and probably will cause mass panic and sell offs.  We will have some form of collective “PTSD” from this shared experience & nightmare for years if not decades to come. I hope I am wrong; I hope I am very wrong.