Our firm continues to follow the John Hopkins site for updated data and to anticipate the inflection point. In addition, we have started to follow The Institute for Health Metrics and Evaluation (IHME) part of the University of Washington. This site is wonderful to see projections for the Country and also broken up by states. If you look at California, they are anticipating the peak resource point on April 14th. What is great news is that California does not appear to have a bed shortage even in the worst-case scenario.
We were lucky enough to be included on a webinar out of Texas with Dr. Dotzour (link to summary) on the outlook of the economy. Dr. Dotzour spoke at a Certified Commercial Investment Member (CCIM) event several years ago and ever since we have followed his opinion. The hour-long webinar was rich with information and support for his projections on the economy.
Dr. Dotzour stated the current recession has characteristics of 9-11, 2008, and WWII. During 9-11 the Country had a fear from the unknown ahead; however today is like a 9-11 in every city in the world. Today the financial foundation is shaking just like in 2008, but the Feds have the tools today to keep the engine going. Dr. Dotzour had anticipated that our economy was two years away from a recession until COVID-19 occurred and now the entire “creation is groaning”.
Dr. Dotzour stated medical supplies are low, households are losing jobs and postponing life, financial markets are hurt more than 2008, and supply chains have been disrupted. What was very interesting is that he feels the overwhelming response from the Federal Government might not be enough. The Feds need to figure out how to fill a three-month hole in the economy. Based on GDP, this hole is estimated at $5.25 Trillion dollars and we should expect to see more stimulus. We shouldn’t be concerned with the deficit and the additional stimulus is needed to get our economy on the path to recovery. We are slightly over 100% of GDP with our national debt and Japan is at 200% as a comparison.
Interest rates are headed down and monetary policy is at the effective lower bounds stated Dr. Dotzour. The 10-year treasury rate affects cap rates, but not in a perfect way. With the decline of the 10-year treasury rate the cap rates should decline; however, there is potentially more risk with properties in this economy, which is the other major component of cap rates. Most likely owners with higher leverage and tenants at risk to continue paying rent will have the most concern. Most lenders are working with property owners to defer payments, but this isn’t common with CMBS and will most likely result in more distressed properties.
He anticipates a strong recovery in the housing market with low interest rates. He predicts 30-year mortgage rates below 3%. Before COVID-19, the housing market was just picking up steam and typically the first real sign of the recovery. With the low mortgage rates and more urban apartment dwellers interested in a home or relocating into suburban areas, the housing market will possibly pick up. Peoples interest in relocating to suburban areas and companies realizing that work can be completed remotely might be a huge boost for the suburban markets, like Redding.
To conclude, he sees a recovery over time with a low interest rate environment and people looking at suburban living again, which is positive for the Redding market. Hopefully we see quality of life being valued more and where else do you have the outdoor amenities that the Northstate offers. Dr. Dotzour does not anticipate runaway inflation and anticipates the products to consider are class C and D apartment complexes and RV parks due to the anticipated raise in housing costs and demand. He doesn’t anticipate inflation because printing money doesn’t create inflation and there are truly no shortages of goods due to the global economy. People are hoarding now and when they don’t need to hoard, they will stop buying and the prices will return the correct levels. From listening to Dr. Dotzour and our clients, I feel strong that we will have a quick recovery and commercial real estate will be a bright option for investment dollars.