COVID-19 has changed the way everyone lives. The chances are good that it will also transform how the economy is run going forward.
The shock of shelter-in-place orders that started in March led to the loss of 22 million jobs, decimating entire industries and triggering $3 trillion of support from the federal government. “By far the largest and most innovative fiscal response to an economic crisis since the Great Depression,” according to Federal Reserve Chair Jerome H. Powell, in a virtual speech last week to the National Association for Business Economics.
President Donald Trump quickly signed the previous package and ordered a national tenant eviction ban. Trump and fellow Republicans are proposing an additional $1.8 trillion of stimulus, while Democrats in the House of Representatives are seeking at least $2.2 trillion.
It’s not just the stimulus, though. Success of the emergency measures, which by all accounts prevented a greater calamity given the economic devastation to many industries, has largely taken away the stigma of government intervention that dominated the policy landscape for decades. That is emboldening politicians and policymakers of all stripes to propose courses of action that would have been unthinkable before the pandemic. Former Vice President Joe Biden’s economic platform encompasses trillions of new taxes and spending that would have been a non-starter in any previous presidential election but has barely drawn notice this year.
“I think the crisis could put us on a different trajectory about what constitutes the safety net and what is the proper role of government and what is not the proper role of government.” So said Austan Goolsbee, a chairman of the Council of Economic Advisors in the Obama Administration and a professor at the University of Chicago Booth School of Business, during a NABE conference panel.
Developments in economic policy could have enormous ramifications in the commercial real estate market. Policy will play a role in property demand, including support for renters, geographic population shifts, the performance of individual sectors, and taxes and regulatory changes.
Blunting COVID-19’s Impact
About half of the 22 million jobs lost earlier this year have been restored, but the U.S. unemployment rate remained elevated in September at 7.9 percent, and Powell said that methods counting such metrics as labor force participation would put unemployment closer to 11 percent.
The Fed chair cited three areas of fiscal and monetary support used to date:
- Aid to individuals, including enhanced unemployment benefits and direct payments. This has helped goods consumption to increase above pre-pandemic levels, while services consumption remains weak due to concerns about infections. Benefits such as enhanced unemployment have played a big role in keeping apartment rent collections from falling too much, though this type of aid expired at the end of July and President Trump has cut off negotiations with Congress to extend it—at least for now.
- Direct aid to companies, mostly via the Paycheck Protection Program, have helped to forestall bankruptcies and reduced permanent layoffs. Powell said business formation appears to be rebounding, though the trajectory for the next couple of quarters is uncertain.
- Policy support to keep credit flowing, through the Federal Reserve’s asset purchases and stated commitment to maintain interest rates at zero for an extended period. That has helped to keep credit to consumers, businesses and property owners available on reasonable terms.
“Taken together, fiscal and monetary policy actions have so far supported a strong but incomplete recovery in demand and have—for now—substantially muted the normal recessionary dynamics that occur in a downturn,” Powell said. “Prompt and forceful policy actions were also likely responsible for reducing risk aversion in financial markets and business decisions more broadly.”
None of these measures has faced much pushback. It’s nearly impossible to find an economist or policymaker that is critical of the initial $3 trillion stimulus package, a stark contrast to the months-long struggle for President Barack Obama to pass a $755 billion stimulus package when he took office during the Great Recession. Some of the difference is due to the makeup of the political parties in office and the timing relative to a national election, but it’s also true that policymakers have had a chance to look back at what worked and have concluded that deploying stimulus to manage a crisis is effective.
Policy Changes Ahead
How much change there will be to policy naturally depends on the election. Democrats have a more ambitious agenda for government support than Republicans, but whatever the outcome, the winner is unlikely to be shy about acting.
Trump has demonstrated an interventionist streak without pushback from fellow Republicans. For example, he prompted the Centers for Disease Control to order a ban on apartment evictions through the end of the year. He has increased tariffs with countries that include China and Canada, inserted the government into individual business deals, and used executive orders to implement policy on issues for which he doesn’t have the votes in Congress, such as ordering the deferral of payroll taxes. Trump has taken an axe to regulations in many industries and pledged to continue to cut tax rates on corporations—although that seems unlikely unless Republicans unexpectedly win back the House.
A Biden presidency seems increasingly likely, given the Democrat’s solid lead in most polls as the election nears. Biden’s agenda is ambitious. It includes raising roughly $3.4 trillion in revenue over the next decade through means such as higher tax rates for high-income individuals, and higher corporate and long-term capital gains rates. Biden’s plan also calls for more than $5 trillion in new spending on such programs as:
- $640 billion in affordable housing investments, including a construction fund, support for low-income renters and housing vouchers.
- A $2 trillion spending plan to increase clean energy technologies.
- Student loan forgiveness and tuition support for low-income students.
- A government option to expand health-care coverage.
How much Biden would be able to accomplish if elected will depend on whether Democrats can win back the Senate, which Republicans now control by a 53 to 47 majority. Failure to do so would severely curtail Biden’s ability to get legislation passed. That said, it’s notable that there has been little negative pushback to Biden’s specific spending proposals.
In previous elections, proposing trillions in new taxes and spending would have been a non-starter and a political liability. Not so in 2020. To some degree, that’s because Trump has decided to pursue other lines of attack against Biden, but the pandemic has also changed the calculus of what the public—and policymakers— will accept.
Moody’s Analytics chief economist Mark Zandi, speaking in an interview last week with Walker & Dunlop CEO Willy Walker, called Biden’s interventionist approach “the right policy at the right time,” arguing that government’s first priority should be to get the economy back to full employment. One in five Americans are unemployed, underemployed or took a pay cut this year, he noted.
The commercial real estate market, Zandi said, should be concerned about the Federal Reserve’s pledge to keep interest rates low until well after inflation rises above its 2 percent target; he warns that high inflation will erode commercial property values over the next five years. But Zandi added that reducing government support now would increase the likelihood of a downturn, which would be a worse option.
Concerns about the deficit have—at least temporarily—taken a back seat to worries about moral hazard. “In the short term, a run-up in deficits is inevitable,” Goolsbee said. “Over the longer run, it will lead to a rebalancing of what ought to be included in the social safety net, and it probably implies a bigger role of government in some sectors than we’ve seen over the last 20-30 years.”
Mixed Outcome for Commercial Real Estate
An activist government is likely to be a mixed bag for commercial real estate. The industry generally prefers a less-is-more approach and lower regulation. Major concerns for the industry today include regulatory overreach, NIMBYism and higher property taxes in municipalities looking to make up for lost income from other types of taxes. The multifamily sector has long waged war against rent control and is now lobbying against eviction moratoriums on the national, state and city level.
However, government intervention also brings benefits long sought by the industry. For example, the National Multifamily Housing Council and other industry groups have been lobbying for temporary direct support for renters and enhanced unemployment benefits. With an eye on the longer term, multifamily trade groups are advocating more tax dollars to build affordable housing and subsidize low-income renters.
On a more general level, keeping job losses to a minimum and preventing companies from going out of business—which would force them to vacate commercial office and retail space and lead to hotel closings—also benefits commercial real estate. Rent collections at many retail properties have plunged as 14,000 stores have closed year-to-date amid mall and restaurant closures. Many hotels have closed, with the industry as a whole operating at less than half of RevPAR compared to a year ago. Hotel and retail delinquency rates are mushrooming. Office properties face defections as corporations reduce space needs and lay off staff.
Much about the next few months remains uncertain, including the direction of COVID-19 and the outcome of the election. Under the circumstances, support is welcome if it keeps the lights on and enables property owners to pay bills and fight another day. Support, however, comes with a cost, even if the price is the likelihood of a permanently changed economic landscape.
Paul Fiorilla is director of research at Yardi Matrix.