A “V” Recovery Is Not In the Cards

A “V” Recovery Is Not In the Cards

The economy will not enjoy a “V” recovery. A combination of defaults, bankruptcies, market disruption and high unemployment will make for a gradual recovery.

  • PPP and Fed liquidity will eventually expire. Admittedly the Fed will likely inject more capital into the economy growing its already bloated $6.6 Trillion balance sheet. At some point this all too forgiving liquidity spigot will run dry.
  • Airlines will likely benefit from further stimulus but not before going through some sort of a forced merger and/or bankruptcy process. Airline travel is down 95% year-over-year and if hotels, motels, resorts, casinos and businesses don’t quickly reopen at or near full capacity, the airlines in present form are not long for this world.
  • Speaking of hotels, motels and restaurants, the retail/hospitality landscape is sure to change. Regional restaurant chains have adopted e-commerce, food delivery and takeout service models. These alternatives to table service are doing well and are taking material share from mom & pop operators (many of whom struggled to fill out their SBA/PPP forms correctly, never mind getting creative with their business). Those with strong balance sheets will survive while many employees will not have businesses to go back to once COVID restrictions are lifted (J. Crew will not be the only retailer to succumb to the dual pressures of COVID and E-commerce threats).
  • No picnic for property owners. CRE transactions have already ground to a halt. Price discovery needs to occur. Our bet is that fundamentals will further weaken for CRE owners – especially retail, hotel and old-styled indoor mall properties. Therefore, CRE Sellers will find religion before buyers acquiesce. Even the mighty warehouse sector could see weakness as smaller retailers with E-commerce/shipping operations shrink. Office space is likely to weaken before it gets stronger. The Tech industry has led the Office CRE market over the past few years and that industry is likely to continue to shrink the number of employees, particularly among SMBs. This will likely translate to a halt in new office building starts and construction employee layoffs. This phenomenon will lag and begin to rear its head as PPP loans expire and tenants file for bankruptcy.
  • Operating efficiency. Yes, operating efficiency is generally a good thing as many companies who did not live through the 2008 downturn are learning. The short-term bad news is that many of those employees that were laid off will not have a job to go back to as the recovery gains traction.
  • High unemployment is here to stay for a while. Yes, it will get better from the June trough. However, unlike the overly bullish St. Louis Fed President believes, unemployment levels will not snap back to anything close to normal by Q4 2020. See the above bullets as to why.