Economist’s View: Look Before You Leap

5 min read

A wait-and-see attitude is the prudent approach when making investment decisions in the age of COVID-19, according to economist Hugh F. Kelly.

Consider the Mexican jumping bean, actually a seed pod within which a moth larva grows. Hold one in your hand and your body heat causes the larva to shift and the “bean” to jump. Remarkable—and fun! (We can use some safe fun in these fraught times). I mention the jumping bean because it is a simple biological example of stimulus/response. Introduce heat and “hop,” without any intervening thought or decision.


Image by Tim Savage from
Image by Tim Savage from

So too, in the initial reaction to the onset of COVID-19 and the economic shutdown that led to the second quarter’s historic 32.9 percent annualized GDP decline, there were some anticipated real estate responses widely circulated. Even this early in the pandemic’s evolution—and I expect the coronavirus to be a direct influence on the U.S. economy for a minimum of the next 18 months or so—many of those real estate expectations appear to be simply jumping to conclusions.

Early theories

With New York City and environs as the first epicenter of disease, for example, we saw much speculation about how dense urban areas, especially those cities that emerged as “24-hour city” real estate leaders over the past quarter-century, suddenly found their strengths transmuted into weaknesses. Vibrant person-to-person agglomeration economies, rich externalities in the form of education, entertainment and culture and the support that mass transit provides to businesses all had presumably become detrimental. Comparative advantage was, by this theory, shifting decisively to suburbs and to the automobile-dominant Sun Belt, where lower densities reduced the COVID-19 risk.

But, since May, we have found that no part of the country is exempt from the coronavirus infection. California, Texas and Florida have now surpassed New York and the adjacent states of New Jersey and Connecticut in confirmed cases. A city like Houston, with deep health-care infrastructure anchored by the Texas Medical Center, found itself scrambling to handle the disease surge. Even rural counties in the Rio Grande Valley saw cases rise beyond hospital capacity. The situation in Florida forced the Republican National Convention to be cancelled as an in-person event. The Mississippi state legislature turned out to be a super-spreader vector.

And so it goes.

Uneven disruption

Hugh Kelly. Image courtesy of IRR
Hugh Kelly

In all, 16 states had daily cases increase by 1,000 or more as of Aug. 5, affecting cities like Birmingham, Ala., Las Vegas, Nashville, Tenn., Phoenix and Charlotte. Several states that had accelerated their economic reopening based upon assumptions related to lower densities and favorable experiences during the first months of the pandemic were forced to roll back their initiatives as disease metrics spiked in June and July, as monitored by Johns Hopkins’ authoritative count of cases, hospitalizations and mortality.

There has been no shortage of webinars, newsletter commentary and client alerts expressing opinions about impacts on particular property types. Offices, for example, are facing countervailing factors whereby the “densification” of space use—more people crammed into less space—may be a reversing trend to accommodate social distancing, but the work-from-home option increases with negative implications for absorption. The aggregate effect on office space demand remains a murky business.

Shelter-in-place behaviors have been a boon to e-commerce providers like Amazon. Amazon’s shares have risen 62 percent this year compared to the S&P 500, which is basically flat year-to-date as of early August. Amazon has hired 175,000 warehouse workers to cope with surging demand. But, although logistics companies and the industrial real estate sector generally have been over-performers in 2020, supply-chain disruptions have come to the fore in the pandemic. A significant rethinking of just-in-time supply models is underway and real estate in port cities, regional distribution hubs and other e-commerce centers will be adapting in ways that are at variance—perhaps sharply so—from the trendlines describing the overall economy.

Wait and see

As far as urban, suburban or rural residential demand is concerned, NAR’s research department indicates some surprising strength on the housing front, with some marginal advantage to suburbs at the moment but with expectations that the major geographic categories will track in harmony in the coming year or so. data shows remarkable consonance in urban core vs. suburban or rural vs. town homebuyer traffic both before and during the pandemic, and an indication that tech hubs including Boston, Denver, San Diego, San Francisco and Seattle are ahead of the curve in a housing recovery.

In sum, the data are fluid in 2020’s third quarter, but they do challenge some of the jump-to-conclusions assumptions triggered at the onset of the COVID-19 era. Worldwide, nations that have more successfully addressed the coronavirus surge of early 2020 are reporting, for instance, that mass transit risks seem to be lower than expected, according to data from France and Japan. But school opening risk is more severe, for example, in Israel.

That fluidity should not surprise us. We still know relatively little about SARS-CoV-2, but we do know that viruses mutate faster than economies or real estate markets. So, for real estate decision-makers, a wait-and-see attitude is a prudent posture. Leaping like a jumping bean based on short-term headlines and knee-jerk assumptions is unlikely to lead to successful behavior either in the immediate future or over any reasonable investment horizon.

Hugh F. Kelly is director of graduate programs & chair of the executive advisory council curriculum committee at the Fordham University Real Estate Institute, and chair of the institute’s executive advisory council curriculum committee. He is a principal at Hugh F. Kelly Real Estate Economics, a consultancy. Kelly is the author, most recently, of “24-Hour Cities: Real Investment Performance, Not Just Promises” (Routledge/Taylor & Francis).

Read the September 2020 issue of CPE.

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