Back to school

Not back to normal

The start of September marks the “Back to School” season in much of the Northern Hemisphere, and as with nearly everything in 2020, education has been impacted by the Coronavirus Pandemic. Getting Back to School reflects the same safety and social distancing challenges as getting back to offices, back to shopping, back to travel, back to socializing, and basically back to “life as we knew it”. As school, work, shopping, and travel all adapt to social distancing requirements, the buildings that enable these activities are also affected. Real estate investors need to identify the winners and avoid the losers as they price assets, determine strategies, and manage through this uncertain period.

As long as COVID remains a major health risk factor, a return to pre-COVID patterns of real estate leasing and operations will be in our estimation, partial at best. Just as parents and teachers worry if school is safe, firms and workers wonder if their office is safe, shoppers worry if a store is safe, and travelers worry if planes, mass transit, dining, or lodging are safe. As this situation persists, more data becomes available on safety and risk factors, and we gradually gain clarity on the economic winners and losers in this pre-vaccine stage of the pandemic. This data often raises additional questions about what happens when COVID-19 is under control and when can we get back to the next normal? The performance of private and listed real estate investments will be driven by this still-unknown future. Just as 2020 is more different than anyone could have predicted in 2019, the next 12 months could also provide a range of surprises.

This macro deck contains a wealth of content about the state of the world today. Admittedly, readers won’t see nearly so much about the future. We know that the level of virus containment (pp. 6,36,43) correlates with mobility and spending (p. 9-12,42). Longer-term, the question is: “Will the economy rebound when the virus is contained, or will the scars of the Pandemic persist?” Low interest rates appear to be the norm around the world today (p. 18-20), but will that persist as life returns to normal, especially in markets like the US, UK, Continental Europe and Japan that have experienced sharp interest rate declines during the Pandemic? Fiscal and monetary stimulus continue (p. 17), but what will be the impact of unwinding this liquidity, and how will governments pay back what was borrowed? The REIT market points to the variety of impacts across sectors (p. 26,27), with investors making calls on long-term challenges for sectors like retail and lodging, and long-term gains for data centers and cell tower REITs. Will these short-term price movements be proven right or wrong? Low interest rates and a desire for more space is boosting demand for suburban housing in many countries, but will this boost in demand be sustained? The pandemic raises more questions than answers, yet we believe investment managers will need to take a view on all of these issues.

In keeping with the “Back to School” theme, we share some data on the re-opening status of schools and universities (p. 4,8). The impact of a University operating remotely for a semester or school year can be significant on the local businesses and the real estate that depend on student spending. One assumption underlying pre-COVID investment strategies was the stability of “Eds and Meds”. We believe this Pandemic is threatening the stability of the education or “Eds” sectors, while providing a boost for some of the “Meds.” The return of economies to normalcy and productivity also depends on primary schools being able to safely educate children in classrooms. The long-term questions for education are similar to the big questions for offices: When is it safe again? What will be the lasting changes from this period of working and learning virtually?

While negative shocks rightfully grab the headlines, we have spotted sectors like laptop computers, home improvement stores (p. 7), data storage, and suburban single-family home rentals, all of which are experiencing booming demand. Based on rising stock markets around the world (p. 3), equity investors appear to be taking the long view that aggregate demand will recover in the not-too-distant future. Recent news, perhaps, provides some reasons to be optimistic regarding the development of vaccines and treatments. While today we as parents, workers, consumers, and travelers struggle with the safety of getting back to “life as we knew it”, as real estate investors, we are optimistic that long-term investment performance will be driven more by pre-COVID patterns of business and household consumption than by this historic, but hopefully brief, period of time. Our research projects, previewed in the Mid-Year ISA, continue to focus on what that future world will look like.