The time-bending power of Covid-19

Speeding up and slowing down all at once

Time has simultaneously sped up and slowed down in a surreal way as we all work from home. Economic forecasts issued last week are now woefully out of date. A recurring comment we hear: “Just three or four weeks ago, this would have been unimaginable.” Where “this” applies to COVID case counts, unemployment claims, counting the number of tenants NOT paying rent, or fiscal packages and central bank backstops worth 10% or more of a country’s GDP.

A new challenge is getting access to reliable data and forecasts. The digital transformation of our industry, currently well underway, should help us figure out what is going on. But it may not be as helpful in telling us where we will be a year or two from now. Sorting fact from fiction and spin is also getting harder. The public markets illustrate the spasms of fear and relief that wash through portfolios on a daily basis. In the words of author Max Brooks, “Panic can spread even faster than a virus.” Brooks teaches at West Point (The Modern War Institute) and is a consultant to government agencies and NGOs on disaster preparedness around the world. He says, “During any pandemic, we must practice excellent fact hygiene.” In that spirit, this month’s macro deck highlights both facts and fact-based opinions, but we are careful to distinguish between the two.

A sharp global recession is underway. Half of the world’s GDP is now under some kind of “stay at home” directive. As a result, the major economies of the world are undergoing a near-simultaneous demand-side shock, with supply-side and financial shocks also underway. Consumers and businesses have stopped spending on non-essential items. Transportation, leisure and construction have come to a standstill unprecedented in peacetime. Manufacturing was among the first industrial sectors hit as factories closed, but with robotics now prevalent and China getting back to work, interrupted supply chains may be able to get repaired. Goods and containers can move across borders, even if people cannot. By contrast, the services sector – especially hospitality and retail services – has been hit especially hard and is still in the early stages of coping with a demand shock that is existential for many small and large businesses.

The financial system is also now under enormous stress—both credit and equity flows. Unprecedented policy responses by governments will try to reduce the ripple effects. Monetary and fiscal actions of historic proportions are being rolled out. Ultimately, credit creation relies on trust, not governments alone. And trust is in short supply right now. Despite historic efforts, credit markets are tightening and investors have become excessively risk averse. Lenders now have record-low base rates provided by Central Banks; but borrowers may not get access to incredibly cheap debt, as spreads widen out. In short, we expect huge differences among property types and markets in terms of risk, resilience and liquidity to manifest themselves.

We first circulated a list of property types at risk six weeks ago, when it became clear that this coronavirus was jumping across borders. The ranking is based on REIT data and feedback from our portfolio and asset managers. (p.9) These lists are intended to give colleagues and clients a sense of where to expect trouble. A contrarian investor may be able to take advantage of overly pessimistic reactions to such lists in the years ahead. But, for now, these are also the sectors that are most likely to experience interrupted income streams and borrower defaults. The “best-insulated sectors” will not be immune and all property types will feel the impact of global recession.

As far as the timing and duration of this downturn, there is still so much we do not know. We do not know exactly what it will take to contain an outbreak, especially where containment measures were delayed or when testing has not been widely available. So, none of us knows exactly when “return to work” policies will be promulgated in each country or metropolitan area — although China is leading the way and could provide the world with an example to follow. We still need to find out what, if any, re-infection risk is associated with “return to work” and how quickly risk-taking, investment, trade and travel will resume to the point where the financial system can recover and function without government support. Underpinning our scenarios are multiple assumptions about when effective vaccines, treatment and testing will be widely available (p. 3 & 7). These “unknowables” lie at the heart of our assumptions and plans. Finally, we may all need to learn the skill of “time bending” to cope with the fast and slow pace of social and economic life in the months ahead.