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Exit from Pandemic Will Mirror a Butterfly’s Flight Path, Says Economist Peter Linneman

It will likely be June or July of this year before Americans feel safe resuming pre-pandemic activities, according to Linneman. Pictured is a walk-up restaurant window in downtown Detroit. (Photo courtesy of Kyle Berryman/KDG)

The U.S. economy’s exit from the COVID-19 pandemic will mirror the flight path of a butterfly, according to economist Dr. Peter Linneman. In other words, it will move forward but also up, down and sideways — quite erratic and not terribly fast.

Linneman’s comments came during a “Walker Webcast” hosted by Walker & Dunlop CEO Willy Walker on Wednesday, Jan. 6.

The butterfly stage will continue until enough people get vaccinated where Americans feel safe resuming pre-pandemic activities, argued Linneman. Once that occurs, we’ll enter the flight path of a more steady “migratory bird.” Linneman’s best guess for that timeline is June or July of this year.

Dr. Peter Linneman

In order to gauge the economy’s progress, it’s best to monitor GDP growth and employment, not corporate profits or the stock market, said Linneman.

In Linneman’s view, 15 percent of businesses and citizens are “really struggling” and will need continued relief and roughly six more months to get their footing. A stimulus focused on that 15 percent segment — including hotel, airline and restaurant workers — is needed, according to Linneman.

“It’s not about spending; it’s about targeting,” he said.

If the U.S. government can effectively target that 15 percent with stimulus relief, then the result will be “productive spending.”

Various property outlooks

As for the recovery periods of the various commercial real estate property types, Linneman said the hospitality industry will need until 2023 to rebound. When asked by Walker if hotel owners can hold on for that long, Linneman said “yes” for bank borrowers because of the Fed’s relationship with banks. However, CMBS borrowers face a much rockier path.

Despite the long road ahead for the hotel sector, Linneman is optimistic for its comeback because “people like to travel and visit cities, which are vibrant economic and social engines.”

Just as there are many Americans eager to travel, there are also many itching to get back into the office. “The honest answer why people will go back to the office is because we have spouses telling us to leave,” joked Linneman.

But the office setting will look different when workers return. Linneman stressed the importance of more square footage. “A lot of companies built their offices over the last 10 to 15 years and went too far in terms of putting workers too close together,” he said. “We sacrificed sanitation.”

For the retail sector, investors continue to compare online versus brick-and-mortar sales. Of the $1.4 trillion in retail sales recorded in the third quarter of 2020, 14.3 percent was via e-commerce, according to Walker. The peak for online sales was 16 percent in second-quarter 2020. That means roughly 85 percent of retail sales are still being done via brick-and-mortar establishments, even during the pandemic.

“As the migratory bird part of this recovery happens, that 85 percent becomes a more competitive beast,” said Linneman.

In the current climate, the apartment market is where Lineman would put his money. Citing good capitalization rates and record-low interest rates, Linneman repeated throughout the course of the webcast that right now is the “golden age” for multifamily.

“The spread is so outlandishly attractive,” said Linneman. “There’s a lot of money flowing into the sector.”

— Kristin Hiller

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