The Economy

2020 Special Issue


The U.S. Economy was in the tenth year of recovery and there were signs of some loosening of standards reminiscent of behavior prior to the Great Recession.  Now, the economy and that recovery have been turned upside down. We asked Doug Poutasse, CRE:

How do we restart the economy – locally, nationally, and globally?  What percentage of the workforce will return to a brick and mortar office? Is this truly the end of the retail mall?

Rebuilding the Economy

By Douglas M. Poutasse, CRE®
Head of Strategy and Research | BentallGreenOak

First, it is important to acknowledge how fortunate we are that this pandemic did not occur during a time of financial or economic distress. Imagine how different the prospects would be if this were April 2009 in the middle of the Global Financial Crisis or April 2012 as the follow-on Eurozone debt crisis was in full flower. The United States was in its tenth year of recovery, the longest period without a month of job loss in history, and some form of correction was inevitable. Wise investors had already shifted to defensive postures. We may not have anticipated this specific Black Swan, but we were prepared for some event or combination of events to bring an end to what was clearly a great party for real estate investors.

Clearly the virus provides unique challenges to restarting the economy, for which none of us have any significant experience or expertise. It will thus inevitably be a period of trial and error. In this respect it is not unlike the sputtering recovery from the GFC, where Central Banks and elected officials kept experimenting until they found the policy solutions which brought stability. The rapid and powerful policy responses in the past two months demonstrate how much we are already benefitting from the GFC experience. My crystal ball is no clearer than anyone else’s but I will share what I see, much of which is undoubtedly obvious to you as well.

The Paths to Reopen

Restarting the economy is not a United States question or a North American question; it is a global question and we are already seeing multiple experimental approaches. Some will work better than others and we should be carefully searching for best practice lessons.

BUT one size definitely does not fit all; the American lockdown has not been the same as the Chinese lockdown or even the French lockdown. In fact there isn’t even an American lockdown, but rather a crazy quilt of at least 51 different state and even more local versions. The same already clearly applies to the paths to return.

Opening up Manhattan and Brooklyn is a very different exercise than opening up Wyoming. Social distancing a dense population whose primary means of movement is public transportation is much more difficult than a rural population with a private vehicle per adult. It is not coincidental that the worst outbreaks have been in densely populated major urban areas.

Returning to the Office

Unfortunately, these same densely populated major urban areas are also the centers of the global economy, so truly getting the economy “going again” will need to involve getting them restarted. If herd immunity is effective, the good news is that these areas are well advanced in developing such immunity.

I’m typing this from my recliner in my “man cave” where I have been working since March 10th. This week I was involved in more internal and external meetings than I can recall in any given week in the past several years. BentallGreenOak and firms like us don’t have to get “back to work”, we have been working at a very high level throughout the crisis. This is very important to remember.

If businesses which have been functioning successfully remain out of their offices, this will give more space (literally) for those who can’t do so to be in the first wave of return. Just as we learned to not all rush to the grocery store first thing in the morning, those of us who don’t need to be on the subway to get to work should defer to those who do.

Seemingly everyone is developing protocols for social distancing in offices. I am sure this work is well-meaning but I am also quite sure that within a few days of putting 100 people back in a 20,000 square foot office space the conversations will cease to be at six feet. So, firms should not put all their workers back together; shifts limit the risk of office wide infection and isolation.

Where work can be done remotely, this does not impair output. Where it cannot, output recovery will lag. Workers in industries deemed essential are already working at or above capacity. Again, it is important to remember that the shutdown has only been in certain segments. But these workers will need a break: output in these industries will likely drop this summer as workers and managements recharge.

Leisure, Travel, and Restaurants

Looking beyond office workers and essential industries, there are the severely impacted sectors of non-food retail, restaurants, hospitality, entertainment, tourism and travel. Most of the demand for these sectors comes from discretionary spending, both domestic and foreign.

Discretionary spending will not magically “snap back”; we are in the midst of a serious global recession and I believe the combination of income loss and weakened “animal spirits” will materially limit consumer spending.

It is hard to envision any material return to foreign leisure travel until there is a vaccine. While for me this means our bike trip to Slovenia has been cancelled, for restaurants, hotels and other tourism businesses around the country and the world this means a prolonged downturn. Some of us will travel and spend more in-country, but tourism is a powerful export industry for much of the world.

Restaurants – yes, we all miss going out for a nice dinner, but how many of us are going to rush back out to be seated two feet from people we’ve never met and served by someone who has closely encountered 50 people in the hour before we were seated? That is the demand side.

Restaurant supply side: sit-down restaurants are always fragile businesses and now they all need to effectively start from scratch. Deep cleaning and then restocking kitchens, rehiring kitchen staff who are making more with supplemental unemployment than they were previously paid, and having “cold re-openings” simultaneously with lots of competitors. Just as it took a decade to get there, it will be years before we get back to the 2019 level.

I will conclude this less than cheerful view of the reopening with one final bittersweet thought: perhaps I will not have to watch my New England Patriots slog along without Tom Brady this year. While we all want to be optimistic about the return of our favorite sports teams, large crowds in arenas and stadiums will be among the last parts of the recovery.