Where Exactly Are We Headed?

Where Exactly Are We Headed?

What is happening out there? Airbnb confidentially filed for its IPO last week. In the spring, the company laid off 2,000 employees and was negotiating over the terms of two fundraising deals totaling $2 billion in debt and equity.

However, total consumer spending on Airbnb in July was 22% higher than in the same period last year, according to Edison Trends. According to the company, it surpassed 1 million bookings on a single day that same month, led by an increase in stays at nearby destinations.

So, are we returning to normal? I would answer no, but there is hope. Normal is a long way away as people are still scared and want to social distance. However, given we can only take so much of staring at the same four walls, we are heading on vacation. Those vacations may not be the ones of pre-COVID days with cruises, trips abroad, or all-inclusive resort, but booking a house for just our family or close friends that we trust, works! Thus as the company reported, bookings are up for close to home destinations, basic economic substitution.

Along with other reports, consumer spending has increased during the pandemic, and I put that down to the fact that we are not spending as much on other things, e.g., commuting, sports, and meals out. However, will that spending last? Last week the Labor Department reported first-time jobless claims increased to 1.1 million, and it was the 22nd consecutive week claims exceeded those during the worst week of the Great Recession. On the positive side, the total number of Americans collecting unemployment fell from 15.5 million to 14.8 million, the lowest since early April. This data goes to show that the recovery will not be quick and a V-curve.

Where exactly are we headed, I am not sure. I hear lots of talk of continued layoffs ahead with about Wells Fargo and Boeing announcing more cuts as well as many smaller companies planning layoff. There is a sense of uncertainty over Q4 2020 and Q1 2021, and expect many are taking a wait and see approach. However, with school restarting, albeit in a confused manner, the Federal Unemployment Benefits in unchartered waters, and Congress in gridlock, there is a lot of confusion out there.

However, as an old Keynesian, the amount of stimulus that the government has poured into the economy is why we are experiencing a robust recovery to date. According to economic theory, in a world of excess capacity and mass unemployment, a combination of vast government borrowing with monetary expansion will not fuel inflation until most of the excess capacity is exhausted, which is where we are now. A Keynesian fiscal stimulus financed with negative real interest rates will boost private consumption and investment and should generate above-trend economic growth. Before the cry of “Crowding Out,” arises from many as I heard during the Great Recession, where all indications showed none. Currently, with central banks worldwide committing to financing this Keynesian stimulus with zero or negative interest rates for years ahead, there is no risk that public borrowing will crowd out private investment.

Thus, will this Keynesian stimulus lead to a healthier and longer growth economy? I would put that down to two factors.

  1. As always, public health. The sooner we adopt and proactive, data, and science-driven approach to the COVID crisis, the sooner we return to a functioning economy. Cases are rising again in Europe, which indicates that this is a marathon and not a sprint. I know for many, it already feels like a marathon, but the more apt analogy is the British in September 1939 saying, “It’ll all be over by Christmas!”
  2. The Stimulus. The actions by the Fed and the Congress, through the CARES Act, have injected substantial stimulus into the economy. However, as these have ended, we will have to observe to see what happens. As in the Great Recession, Congress stopped the stimulus too soon, for political reasons, which lead to a much weaker recovery than there should have been. Hopefully, this time, they will put the country first and give the economy what it needs to recover.

A lot of economists are arguing that the stock market is pricing in continuous stimuli for the economy, and if Congress fails to deliver the will, a market correction to accompany the economic contraction.

For those gnashing their teeth and anguishing over a Keynesian expansion, it is worth remembering that the 20 years of broadly Keynesian macroeconomic policy in place from 1946 until the late 1960s saw the most robust economic growth and productivity advances ever recorded. At the same time, we experienced generally moderate inflation and almost continuous bull markets in equities, property, and other real-value assets.

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The Future of the Gig Economy

On Monday, a court in California rejected Uber, and Lyft claims that they didn’t need to treat drivers as employees under AB5, a state law passed in 2019. Under AB5, there are three criteria a company must deem to meet to consider workers, independent contractors, namely:

  1. Weighing the employer’s control over how the work is performed;
  2. Whether the services are within the normal course of business; and
  3. Whether the workers have an independently established role.

Uber CEO, Dara Khosrowshahi, has said that if the court doesn’t reconsider, Uber will shut down its services from the state. This strategy seems to follow Travis Kalanick’s approach – If you own the market, the regulators will have to placate you. Following that strategy should bode well for Uber as the Customer always wins. If Uber were to close down Californian operations, there would a massive cry from both customers and drivers, which could force the state to back down. How this unfolds will be observed by other states, e.g., New Jersey, Massachusetts, and Connecticut, which are using the same standard to determine who is and isn’t a gig worker, and New York and Illinois are considering similar legislation.

Gig work describes independent contractors, remote work, part-time employment, and temporary employment. If someone works for a platform like Fiverr, Uber, or Lyft, then they are part of the gig economy.

While there has been tremendous growth in the gig economy over the last few years, most of it is unskilled work such as driving, delivering, and doing simple errands. A vibrant gig economy for knowledge workers — engineers, consultants, management executives — has not yet materialized. 

 

The Stats and Facts of the Gig Economy

  • From nothing in 2014, 57.3MM people performed gig work in the U.S. in 2019.
  • 20% of gig workers earned over $100k in 2019.
  • 85% of gig workers make less than $500 a month from a single side-job.
  • 40% of gig workers had medical insurance.
  • 39% of gig workers have no retirement savings.
  • 55% of Baby Boomer gig workers have medical insurance.
  • 59% of gig workers are satisfied with their financial situation.
  • 95% of gig workers say flexibility is essential.
  • 19% of gig workers would want a traditional job.
  • The main reason for gig work: 18 – 29-year-olds: Need extra money, Gen X: Need money to make ends meet, Men: “Love being their own boss.”
  • Only 35% of America’s gig workers are female.
  • Almost half of all millennials use online gig economy platforms to find work.
  • The total gig income is almost $1 trillion.
  • On average, gig workers earn 58% less than full-time employees.

Where are the gig workers?

Source: Statista

As can be seen from the above, the Gig economy is significant, is here to stay, and absorbing more jobs and professions. So what are the issues? 

 

Pros of the Gig Economy

  1. Workers have more flexibility. As noted above, 95% of such workers say flexibility is essential. They use this flexibility to gain the work-life balance they need. 
  2. Gig workers like their independence. As note above, men identified the main reason for gig work is that they “Loved being their own boss.” Gig workers are not micromanaged and can enhance the quality of work for some.
  3. Gig workers have access to a greater variety of employment opportunities. Freelances often stay in control of their assignment, deciding whether or not to accept a client. They are not stuck with the same monotonous tasks every day.
  4. Some gig workers work from home, so they have zero commuting costs. Before COVID, this could save $30 to $50 a week commuting to work.
  5. Lowers companies’ costs. Businesses only have to pay for the labor they receive and don’t have to pay for equipment. Besides, they don’t have to provide benefits or pay state unemployment taxes, and in many cases don’t offer space.
  6. It allows companies to scale quickly. Startup and small companies find gig workers enable them to scale at a lower cost promptly. They can race to meet market demand and budget restrictions.
  7. Workers don’t need to cater to the company culture. Gig workers have their own culture. They don’t have to be involved in team-building exercises, corporate rallies, or pander to office politics.
  8. It is suitable for the creative worker. The variety of work enables some workers to explore their full creativity, increasing the quality of work.

 

Cons of the Gig Economy

  1. Less flexibility than thought. While many experienced gig workers, e.g., graphic designers can pick and choose clients and projects, many of the ordinary gig workers don’t have that luxury. Several online platforms use variable pay, rating systems, and notifications to push people to accept specific jobs and work certain hours. These practices, called algorithmic management, limit the flexibility of work. 
  2. No benefits. Most gig workers do not receive any benefits, regardless if they are working 40+ hours a week. Thus they are responsible for their health insurance and retirement contributions, as is seen above. COVID has shown the problems with this. Many gig workers suddenly have no income, but cannot claim unemployment benefits. Furthermore, with a public health crisis, few having health insurance slows the solving of the crisis. Many who don’t have insurance will not seek treatment as they cannot afford it or cannot take time off work to get it, and second those that do, face bankruptcy because they cannot pay for whatever treatment they have.
  3. More taxes. Since gig workers do have tax withheld, they have to pay income tax and self-employment taxes from their pay, requiring them to withhold 25+% for those purposes. Also, concerning self-employment taxes, gig workers pay both the employee and employer taxes, unlike full-time workers. Finally, gig workers have to manage cash flow as they have to file taxes quarterly, so they will have to save enough to make those payments.
  4. Gig workers considered lazy. Since many gig workers work from home, many will consider them lazy and nonproductive, which causes social issues.
  5. Gig workers have high levels of isolation. Gig workers miss the social element of work, discussions around the water cooler, chats with teammates, office events. Lack of the office environment leads to isolation, which can cause mental health issues, as we are seeking with the COVID work from home and suicided rates.
  6. Gig workers drive more. While gig workers don’t have to commute daily, they end up driving more during a week as they move to pick up and deliver projects or from work site to work site. This increase in driving increases costs and stress.
  7. More stress for gig workers. Full-time workers know that their employment position is relatively secure. Although layoffs can happen, the risk of such a circumstance is relatively low for the average person. Gig workers have several different stresses. They are always looking out for the next job. They have to be prepared for changes to occur in their current assignments, including being let go in the middle of a task. Thus, their income is never really 100% secure.
  8. Companies may find their workers are not as reliable. This lack of reliability is a result of workers not adopting the corporate culture. Since gig workers are external, they don’t have to adapt to the corporate culture, and cultural fit is not a hiring requirement. Furthermore, since they are interested in their well being over the corporations, thus, while they will work, they may not work as hard, do what the organization considers “right,” and go the extra mile. Since happy employees lead to satisfied customers, this will reduce customer satisfaction if they interact with customers.
  9. Gig workers must continuously up-level their skills. Gig workers must continue to up-level their skills to get better because new gig specialists enter this field every day. The levels of industry knowledge that they receive must increase if they want to keep receiving contracts or employment offers. Thus, gig workers have to build in continuing education into their schedules. While this will keep them relevant, it is time that they are not earning.
  10. Gig workers need to budget for vacations. Gig workers don’t get paid time off, so they need to budget for the fact that while on vacation, they will be spending money and not earning money. Furthermore, many have to give one to three months of advance notice to clients that they will not be available. Finally, if a job comes up as they are about to leave, they may not want to turn it down as they could lose a client.
  11. It takes longer to build a depth of experience. In an organization, employees are often put on cross-functional teams to address issues. As a result, they create networks and knowledge across many areas of the organization. Gig workers are siloed and don’t build any skills or experience outside their narrow field, limiting their development and earnings potential.
  12. Us and Them. Many companies have large numbers of gig workers, e.g., Google has more gig workers than full-time workers. Since gig workers are not part of the organization, earn less, and have less opportunity to work in cross-functional areas, they are considered fungible and, in many organizations, are considered less than employees, creating an Us v. Them environment. Furthermore, most gig workers perform specific tasks, not the “package.” The package is more complex and requires working and information sharing across the organization, which gets harder for gig workers who don’t where the information lies due to their lace of organizational knowledge.
  13. State Tax Revenue. While gig workers have to pay FICA taxes, they are not obliged to pay state unemployment taxes. A study found that if Uber and Lyft had classified its drivers as employees in California, between 2014 and 2018, they would have paid $418 million into the California unemployment insurance fund.

 

Race to the bottom

A trend that has picked up during COIVD is the race to the bottom. As many people found themselves jobless, they applied for gig jobs. Upwork has seen a 50% increase in freelancer sign-ups since the pandemic began. Talkdesk, which launched a gig economy platform, witnessed 10,000 new applications within ten days. Instacart hired 300,000 additional workers in a month at the beginning of the COVID crisis and, in April, announced it would add 250,000 more.

On platforms like Upwork and Fiverr, many freelancers are already feeling the pinch. With a large number of new workers, given the laws of supply and demand, many gig workers are now vying for freelance work and pitching their services for lower rates to make money.

Now there are too many would-be workers to make the gig economy viable for many of them, and this may be irreversible as companies adapt to the reality of a global recession. By keeping headcounts low, companies will drive more desperate people into the gig economy, expanding the potential labor pool for jobs and driving down the prices that workers can command. 

 

The Recovery

The pandemic has shown that as business recovers, digital economy companies will benefit from their ability to be more flexible than other industries in certain aspects. COVID will probably intensify investors” growing scrutiny of the path to profitability for companies, making them increasingly wary of startups” strategies that favor scale before profitability. Thus gig workers will be vital in meeting this metric.

Also, many governments are now leveraging gig work to fast-track recovery. Having seen how digital platforms have contributed to crisis management and recovery using their nimble operations, flexible thinking, and technological prowess to get things done quickly, India and China are promoting gig work to drive growth in the economy. 

 

So What

Gig work is here to stay, and it will be vital for economic recovery. We must realize; however, that gig workers are not just drivers and delivery people. Presently many occupations are effectively gig jobs, e.g., journalists. However, the issues laid out above are massive and require addressing for gig work to be successful for all. Otherwise, we continue our move to a Hunger Games society.

As Dara Khosrowshahi recently said in an oped in The New York Times, we need to redefine “workers” and have new laws rather than the binary system today. We need to address the reality that this is how millions of people earn some or all of their livings. As a result, we need to ensure that:

  • Gig workers can move easily from job to job;
  • Gig workers receive healthcare benefits. During a pandemic, we have realized that public health is an essential requirement, and the U.S.healthcare system is not designed to meet it. While ObamaCare causes a visceral reaction for many, much of the thinking behind it was to enable workers to have health insurance not tied to employment. While it may not work well, it needs improving to meet this need for now and the future, not removal and reversion to the past.
  • Gig workers receive retirement benefits. Our outdated IRA and 401ks need to restructuring so that gig workers can more easily contribute to them. Today a quarter of Americans have no retirement savings.
  • Gig workers need to receive unemployment insurance of some form so that when we have a second COVID like situation, millions are not driven into financial distress due to lack of protections.
  • Companies need to contribute towards these benefits so that it doesn’t fall on those who can least afford them, or bore by all taxpayers.
  • Changes the balance of power structure between gig workers and corporations in negotiating rates. Our current system encourages a race to the bottom that is detrimental to the gig workers and beneficial to the shareholders. This system reinforces the current U.S. system or rewarding capital at the expense of labor and winnowing out the middle class. It needs addressing, but that will be complex and not easy.
  • Companies need to develop better ways of onboarding gig workers to remove the Us v. Them situation. Also, even though these workers are task-specific, smart organizations will start to ensure that gig workers share their core values to ensure that they get better results from them and can use them for the “package.”

If we can address these issues, then the economy should be able to recover quicker and have a flexible, practical framework for future growth while protecting many. If not, the migration to a Hunger Games society will continue, creating more problems and social unrest. However, I believe we up to the task.

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Well, we have been working from home now for nearly five months and probably will continue to do so for another year.

So what is the verdict? 

 

The Good News

Many leaders anticipated that employee performance would significantly deteriorate. Given that numerous studies over the years had shown that falls in productivity accompanied a significant change, their expectations were not unfounded. However, a Harvard Business School survey indicated that workers adjusted to working virtually far quicker than expected. In many cases, workers felt they were as productive as they were before. According to one employee, “I’m able to get everything accomplished just like before, and I think everyone else is finding they can too.” This quick return to productivity is remarkable.

Not to say the changes didn’t cause problems. Job satisfaction and engagement fell sharply after two weeks of working virtually. However, by the end of the second month, both measures had recovered dramatically. As another employee put it, “It took some time to get used to it and for things to go right. It was a learning process.”

The improvements in satisfaction and engagement resulted from organizations finding the right balance between meeting and work time. There were issues with too many virtual meetings, leaving no time to do the actual work. Also, people had to get comfortable with communicating over Zoom, Skype, Teams, etc. 

 

Work-Life Balance

The biggest issue was figuring out how to manage work-life balance, basically turning off work at home. According to research, managers who cannot “see” their direct reports often struggle to trust that their employees are working. With such doubts, managers sometimes start to develop the unreasonable expectations that team members be available at all times, ultimately disrupting their work-home balance and causing more job stress.

Data provided by Humanyze from email, chat, and calendar systems across a global technology company supported the HBR survey results. The data revealed that the workday significantly increased at the beginning of all-virtual work. Immediately after the lockdown began, about 50% of employees could maintain at workday of 10 hours or less, compared to 80% pre-COVID. While workday time has started to trend back to pre-lockdown levels, workdays are still 10% to 20% longer on average.

Furthermore, since all-virtual work began, employee stress, negative emotions, and task-related conflict have all been steadily falling; each is down at least 10%. Also, employees have experienced an approximately 10% improvement in self-efficacy and their capacity to pay attention to their work. Employees now say they are “falling into a consistent routine,” “forming a pattern [of work time and breaks] with my coworkers,” and “learning what makes me the most productive and how I can best manage my time and energy.”

From CEOs down, many saw benefits from working from home, including a reduction in travel. One CEO hoped that this had put an end to the ‘fly across the country for a one-hour meeting’ expectation forever.” Overall employees reported that they had:

  • More focus time
  • Shorter meetings
  • More flexible time with family; and
  • No loss over missing the daily commute.

 

Challenges for Managers

While the research has shown an increase in the workday and performance returning or above pre lockdown levels, not all management attitudes reflect this. Different HBR research suggested that of managers:

  • 56% are not confident in their ability to manage remotely. Their beliefs about remote employees’ performance reflect their lack of confidence in their ability to manage their reports.
  • 60% agreed or were uncertain that remote workers usually perform worse than those who work in an office. 
  • 58% questioned whether remote workers could remain motivated over time.

The research further shows that:

  • Men are more likely to have negative attitudes to remote working and mistrust their own employees’ competence.
  • Those in non-managerial/non-professional roles had lower self-efficacy for managing remote workers, more negative attitudes, and greater mistrust. 
  • Younger managers are more likely to lack self-efficacy for leading remote workers.

With COVID, many employees are facing increased stress, especially for those with compromised finances or families requiring care. Thus some are struggling to perform at their pre lockdown levels. The concern is that this will create a negative feedback loop in which manager mistrust leads to micromanagement, which then leads to drops in employee motivation, further impairing productivity.

Therefore, managers at all levels need support and training, so that management quality will improve, which will improve remote workers’ wellbeing and performance. This support for managers must be a critical focus of senior leadership if employee performance is to remain high as companies move forward with possibly another year of work from home. 

 

What Else Could Go Wrong

With Google now saying that employees can remain virtual till summer 2021 and others following suit, should we all go virtual were we can?

A key issue with a virtual workforce is the loss of unplanned interactions that lead to significant outcomes. In physical offices, people who don’t usually work with each other to connect accidentally, and that interaction sparks new ideas. While the HBR study found employees increased their communication with close collaborators by 40%, contact with other colleagues fell by 10%. Also there less schmoozing and small talk among virtual workers, which has shown to lead to lower levels of trust.

In addition to a lack of spontaneity, three other issues face organizations in a virtual world that undermine organizational health.

Onboarding new employees
Research has shown that great onboarding involves two sets of activities:

  • Exposing new employees to “how things are done around here” by indoctrinating them into the company’s vision, history, processes, and culture; and
  • Allowing them to apply their signature strengths and express their genuine selves.

While the first has been adapted relatively well to a virtual world, the second is much harder. To achieve the second requires numerous in-depth interactions, and existing employees are accustomed to having those in person.

Weak Ties
These are the shallow or peripheral relationships among members of an organization who don’t work closely with each other but have nonetheless connected over time. Weak ties play an important role in organizational performance, including innovation, raising or maintaining product and service quality, and attaining project milestones. If people cannot interact face to face and just connecting through Zoom and document sharing, weak ties are under threat.

Fostering relationships
It is hard to foster relationships in a virtual environment outside your direct team. Furthermore, with everyone working from home, companies are finding more-limited value in rotational programs, cohort-based training programs, or even cross-functional staffing assignments. While the return from such programs is hard to identify at present, it is an investment that has a significant ROI in the long term. Long-term relationships that once sprang from such shared experiences are undoubtedly at risk and weaken the organization. 

 

What Happens as Some Return

A possible reason identified for the continued performance of virtual employees is that everyone experienced simultaneously, while in prior studies, only some had been working from home. If this is right, then the problem may return when office work resumes.

Presently, those who have returned to the office are a minority, comprising those who find it most challenging to work at home. However, as more people go back to the office for various reasons, those who remain at home may start to feel isolated, affecting performance.

A key reason for employees to return is paranoia. The pandemic has helped managers identity those who are indispensable and who are not. For those deemed non-indispensable, there is the concern that lack of sight will result in termination or offers of early retirement. As more people reason the same way, the pressures to return will grow. Once those back at work reaches a critical mass, the rest may be obliged to follow suit.

For the moment, it is waiting and see.

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COVID is leaving a trail of destruction across the country!

 

Retail

As COVID has brought tourism to a temporary standstill, left consumers avoiding others and ordering online, and millions are saving rather than spending, retail is suffering. Expectations are that Global luxury retail sales will fall by 29% in 2020. With falling sales and bankruptcies, America’s prime retail districts are losing tenants, and rents are in free fall. The Covid-19 crisis will likely have a lasting impact on premier shopping streets e.g., 5th Avenue in New York, the Magnificent Mile in Chicago, the Las Vegas Strip, and Rodeo Drive in Los Angeles. It appears that while sales at premier locations are falling, sales closer to home and in the suburbs are recovering faster.

According to Naveen Jaggi, president of JLL’s Retail Advisory team, “We will see an extension of what happened in 2008 and 2009, which left American consumers shifting toward value more aggressively. More and more retail real estate space is going to be taken up by non-luxury. Take Fifth Avenue. You see a Vans, a Five Below, and a Timberland. Those kinds of brands are the ones taking space. That’s all you need to know about the direction of Fifth Avenue.”

The reasons for the movement of non-luxury into these premier shopping areas are the new companies are still profitable, and rents are falling. In New York, the impact is:

  • During Q2, 2020, average asking rents along major retail corridors in Manhattan had declined for the eleventh consecutive quarter. Prices have dropped 11.3% from a year ago, and for the first time since 2011 were below $700 per sq. ft.
  • Rents on Prince Street in SoHo experienced the most significant declines, falling 37.5% year-over-year to $437 per sq. ft.
  • The Upper Madison Avenue corridor from 57th Street to 72nd Street, saw rents drop 15.3% from a year.
  • The Plaza District along Fifth Avenue, which runs from 49th Street to 59th Street, saw rents fall 4.8% from a year ago.
  • The number of ground-floor leases available in Manhattan’s 16 retail corridors hit 235 a record.

Furthermore, it is not over; CBRE is expecting rents to continue falling through 2020.

COVID’s acceleration of the decline of malls is relentless, driven by falling retails in-store sales but also excess retail space. The U.S. has more square feet per capita or retail space than in any other country, and that is not sustainable.

Several retailers have stopped paying rent during the pandemic, which in some cases is resulting in litigation. Simon Property Group is suing Gap Inc. for not paying its bills. Furthermore, many retailers are also using the pandemic as an opportunity to renegotiate their leases to get better deals, as property owners are desperate to fill space.

 

Office

COVID has put the brakes on the U.S. office market too. Data from JLL shows that in Q2, leasing in the U.S. dropped by 53.4 percent. Also in Q2, the U.S. office market experienced occupancy losses of 14.2 million sq. ft., bringing year-to-date net absorption to -8.4 million square feet. Most of this was due to the lockdown, but also partially due to wait-and-see strategies, and additional time spent negotiating. In addition, for the first five months of 2020, the average term of an office lease in the U.S. fell 15 percent to about seven years, primarily driven by tenants at the end of their lease. According to Ben Munn at JLL it’s “likely to fall farther.” Office development remained constant and in New York City 25MM sq. ft. of new office product is still planned for delivery between now and 2024

Companies are avoiding long-term decisions, instead, they want flexibility and are currently extending work-from-home programs. Analysis by the National Bureau of Economic Research showed 37 percent of jobs in the U.S. can be performed entirely at home. According to Marc Landis, the managing partner at Phillips Nizer LLP, “As we start talking to clients about their needs, and the balance of this year, and deals they want to do in 2021, they’re absolutely looking for less space and greater flexibility. I saw hesitancy in the transactions where we were involved. People are more focused on what they could cancel or change as opposed to new deals.”

Rent abatements and deferrals for existing leases, as well as collections, are still taking most of the effort at the moment rather than new leases. Companies are choosing to renew or extend leases rather than search for new space at this time. Like many other areas, strong relationships and contract stability with landlords have been key. Traditional landlords have been much better than coworking models like WeWork. According to Landis, “WeWork participants found that they were not given a great deal of flexibility. Unlike a traditional commercial landlord, who would take a long view and work with the tenants in the short term, WeWork greeted people with an extended middle finger.”

What happens in H2 2020 will depend on any additional government support and the resurgence of COVID. A survey by Morning Consult showed one-third of remote workers won’t return until a vaccine is available. However, the bright light was Facebook’s large 730,000 sq. ft. lease in Midtown Manhatten, taking its acquisition of New York office space to over 2.2MM sq. ft. in less than a year. Whether others follow suit is yet to be seen.

 

Residential

The impact of COVID on residential rents is reflective of what COVID is doing to the country. The most expensive cities, cities across the oil patch, college-focused cities, and tech and education hubs such as San Francisco and Boston are experiencing sharp year-over-year rent declines. San Francisco has seen the decline in rents for one-bedroom and two-bedroom apartments decline by 11.8% and 12.1% respectively over the last 12 months. Not only is San Francisco suffering. The following table shows the 35 cities among the top 100 rental markets with year-over-year rent declines in July for 1-BR apartments.

Decliners 1-BR Y/Y %
1 Syracuse, NY $820 -15.5%
2 Madison, WI $1,060 -11.7%
3 San Francisco, CA $3,200 -11.1%
4 Irving, TX $1,030 -9.6%
5 Laredo, TX $750 -9.6%
6 San Jose, CA $2,300 -9.4%
7 Denver, CO $1,440 -8.9%
8 Aurora, CO $1,090 -8.4%
9 Seattle, WA $1,760 -7.4%
10 New York, NY $2,840 -6.9%
11 Providence, RI $1,400 -6.7%
12 Charlotte, NC $1,240 -6.1%
13 Tulsa, OK $620 -6.1%
14 Boston, MA $2,350 -6.0%
15 Fort Worth, TX $1,090 -6.0%
16 Anaheim, CA $1,650 -4.6%
17 Orlando, FL $1,240 -4.6%
18 Santa Ana, CA $1,700 -4.5%
19 Virginia Beach, VA $1,050 -4.5%
20 Louisville, KY $860 -4.4%
21 Los Angeles, CA $2,140 -4.0%
22 Raleigh, NC $1,040 -3.7%
23 Salt Lake City, UT $1,030 -3.7%
24 Oakland, CA $2,220 -3.5%
25 Houston, TX $1,110 -3.5%
26 Pittsburgh, PA $1,050 -2.8%
27 Washington, DC $2,160 -2.7%
28 Spokane, WA $830 -2.4%
29 Corpus Christi, TX $830 -2.4%
30 New Orleans, LA $1,400 -2.1%
31 Durham, NC $1,090 -1.8%
32 Plano, TX $1,150 -1.7%
33 San Antonio, TX $880 -1.1%
34 Scottsdale, AZ $1,420 -0.7%
35 Minneapolis, MN $1,390 -0.7%

However, it is not all bad news. There were 60 cities with increases in 1-BR rents – compared to 35 cities with declines. The top 35 increases were:

Gainers I-BR
1 Cleveland, OH $940 16.0%
2 Indianapolis, IN $870 16.0%
3 Columbus, OH $810 15.7%
4 St Petersburg, FL $1,270 15.5%
5 Reno, NV $1,050 15.4%
6 Chattanooga, TN $900 15.4%
7 Cincinnati, OH $900 15.4%
8 Baltimore, MD $1,360 15.3%
9 St Louis, MO $910 15.2%
10 Norfolk, VA $920 15.0%
11 Lincoln, NE $770 14.9%
12 Detroit, MI $700 14.8%
13 Rochester, NY $960 14.3%
14 Chesapeake, VA $1,130 14.1%
15 Memphis, TN $830 13.7%
16 Bakersfield, CA $830 13.7%
17 Des Moines, IA $920 13.6%
18 Newark, NJ $1,290 12.2%
19 Boise, ID $1,070 11.5%
20 Nashville, TN $1,300 11.1%
21 Akron, OH $610 10.9%
22 Sacramento, CA $1,430 10.0%
23 Fresno, CA $1,100 10.0%
24 Wichita, KS $670 9.8%
25 Philadelphia, PA $1,500 8.7%
26 Oklahoma City, OK $750 8.7%
27 Arlington, TX $890 8.5%
28 Gilbert, AZ $1,310 8.3%
29 Tucson, AZ $700 7.7%
30 Richmond, VA $1,150 7.5%
31 Colorado Springs, CO $1,000 7.5%
32 Winston Salem, NC $820 6.5%
33 El Paso, TX $690 6.2%
34 Buffalo, NY $1,050 6.1%
35 Atlanta, GA $1,470 5.8%

While many of the gainers are showing gains in double digits, it is still too early to celebrate. The gainers are due to people moving home as they can WFH, or they have lost their jobs and seeking to save money.

However, the moratorium on evictions has just ended, and whether or not the President or Congress renews it, it is artificially affecting the market. If the federal eviction moratorium isn’t reestablished soon 40% of US renters are at risk of losing their homes, according to Statista. The CARES Act’s eviction safeguard is thought to have helped as many as 23 million US families (roughly one-third of all US renters) stay in their homes during the coronavirus recession.

Furthermore, without additional unemployment support, many more renters will be unable to pay their rents.

The issue for landlords is:

  • If there is no additional unemployment benefit provided, more tenants will stop paying; and
  • If they evict those that are not paying, who do they replace them with, one unemployed tenant is no better than another.

I expect this to put further downward pressure on rents, but not just in those cities in the most significant decline list, but reduce the increases in the second list. The issue is how much will the collapse in low rental costs, where most of the unemployed live, affect more expensive rental properties.

I expect COVID to continue to wreak havoc for at least another 12 months, what the rental market will look like then, who knows. But it will be different.

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  • “I don’t think the economy is going south; I think it’s going north.” The economy fell 32% on an annualized basis in Q2. While there was an improvement in late Q2, it appears to be reversing as cases and deaths rise in the South and West.
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  • “You’re in a retail-sales boom right now.” While retail sales recovered in July, they were down 25% in Q2 and are still below last year.
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  • “New business applications are skyrocketing.” Business applications were down 2.9% in Q1 and rose 2% in Q2 over the prior year. Again some improvement, but skyrocketing, I think not.
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Now I understand that the administration is trying to push the narrative that the economy is excellent, and we must return to “normal.” However, as I have said many times before, this is a public health crisis, and until we fix the public health crisis, we cannot fix the economy. The surge in cases and deaths through the South and West have harmed the economy in those areas. As the COVID cases stabilize and fall, they should rebound. However, we are now seeing cases starting to surge in the middle of the country. Next up is the winter with flu season and more COVID cases as people stay indoors.

Many good CEOs believe that when talking to your employees during times of crisis, you need to be honest, and I totally agree. They can see what is going on, and if you paint everything in a positive light, you diminish credibility and lead them to fear the worst. So it is with the country. The administration needs to be honest, stop promoting solutions that are ineffective from people that believe “endometriosis and other potentially dangerous gynecological conditions are the residue of sexual intercourse with demons.”

For me, Larry Kudlow lost credibility with after his piece in 2005, “The Housing Bears are Wrong Again” in which he dismissed “All the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.” His piece in 2007, “Bush Boom Continues,” where he predicted the economy would continue to grow just as it was collapsing, only confirmed my views. A banker who worked with Kudlow at Bear Stearns was quoted in Vanity Fair, “Over his entire career, I can’t recall a single forecast that he made that was accurate. You know, there’s the old joke about the economist that predicted seven out of the last four recessions. Kudlow makes that guy look good.”

Sending out Kudlow weakens the belief in the Administration by Wall Street and CEOs, which slows any economic recovery. Be honest and this time “Is the public health crisis stupid.”

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