We’ve been concerned for a good while that a recession was ahead. Multiple talking heads suggested that “we were going to talk ourselves into a recession.” Individuals who study the financial market saw this with the inversion of the yield curve in 2019. A two-sentence primer on the U.S. Treasury Bond yield curve - The yield curve is a graph showing interest rates on various U.S. Treasury bonds. Higher rates indicate lower investor demand. Shorter term bonds generally have lower returns because of investor preference for the flexibility of a short-term investment.
When the yield curve inverts, short-term interest rates are higher than long term interest rates — an unusual event indicating investors are concerned about the future of the economy and prefer the relative safety of U.S. Treasury Debt.
In the 1980s, Duke University Professor Cam Harvey showed that an inverted yield curve accurately forecasts U.S. recessions; see e.g. this 2008 slidedeck. Late last summer, he again forecasted the likelihood of a recession in 2020. At that time the question I heard over and over again was, “We know a correction is coming, we just don’t know what the trigger will be.”
I think now we know — COVID-19. Financial markets don’t like uncertainty. Actually, no one likes uncertainty. But financial markets REALLY don’t like uncertainty. This virus in a crazy, and certainly not preferable, way has provided some clarity.
COVID-19 is new and there is a lot about this virus scientists don’t understand. But we do have a direction, and we have very smart people working on an identified problem. Thankfully, our financial institutions have also learned a few lessons from 2008.
Lending continues
There is a big difference between now and the last recession. Banks are better capitalized and have money to continue to lend. In some cases, banks are even offering supportive actions such as deferred payments to businesses.
I’m asking tenants at Building1 about the impact of the COVID-19 crisis on their business flow. Residential agents report that the market continues humming along swiftly. A general contractor says he’s experiencing much the same, if not more demand. He commented that he is so busy, he is not taking on additional work. Interestingly, some of this might naturally come out of “social distancing/sheltering in place.” (When you’re forced to stare at your walls, you’ll notice every crack!)
However, commercial agents see some softening. Commercial real estate covers so many industries that it’s hard to see a complete slowdown. For instance, we always need medical space, but overall deal flow has definitely slowed. I spoke to a local banker who reported that deals in the entertainment, retail, and restaurant sectors are being put on hold and banks are tightening credit for these industries. However, he also said that deals for office space in fields such as law and accounting are still moving forward.
Not surprisingly, the situation changes as project scale increases. A lot of investment in large commercial properties is reportedly on hold because of huge uncertainty about COVID-19.
There is still a significant amount of uncertainty as to how long the current recession will last. Many academics, Professor Harvey included, are suggesting a long recovery but some optimists see a quick bounce back.
The Triangle is the place people want to live and work
The most powerful driver for our local real estate market is that The Triangle region continues to draw new residents and businesses. Technology and life sciences, two sectors with a large presence in this area, are more important now than ever. There may be structural changes with how work gets done as our economy and society adapt, but there are definitely benefits to doing business in The Triangle.
Next post: Silver Linings