On today’s show, I’m making a prediction on the economic outlook for Q4 and the broad impact I project it to have on real estate markets.
The economy in Q4 is going to take a hit. We saw a resurgence of employment, a modest increase in consumption and a return to limited travel in Q2 and Q3. But new unemployment claims remain historically high. Prior to the pandemic, the US economy registered an average of about 250,000 new unemployment claims in a normal week. Since the pandemic, new jobless claims have been above 700,000 every week. The first 6 weeks of the pandemic registered 32 million job losses. We are still in a very troubled economy from a labor standpoint.
The other major driver of the economy is consumption. The law of averages tends to apply. If the population hasn’t increased, and people are still eating three meals a day, the amount of food consumed on average won’t fundamentally change when averaged over the course of a year.
Toilet paper sales surged in Q2 when it looked like there might be shortages. Those who were in the business of selling toilet paper might have felt like they won the lottery. But on average, if toilet paper sales surged in Q2, it makes sense that they might fall below average in Q3 or Q4. On average, toilet paper consumption at the final point of use, next to the toilet over the longer term isn’t going to increase just because there was a lockdown.
There is a business cycle in retail that has historically held true. Many retail businesses generate 50% of their annual profit in Q4 during the period between Thanksgiving and the end of the year. But this year could be different. We have many areas going into a new wave of Covid-19 outbreaks. This will mean a reduction in business activity, a reduction in social interaction, a slowdown of commerce. If family members are not traveling for the holidays in large numbers, what will that mean for retail sales?
If family gatherings are going to be scaled back this year, it makes sense that gift giving will also be scaled back. Some gifts will be sent by mail or delivery service. But it makes sense that fewer gifts will be bought this year. The big question is whether people will treat themselves to a gift on a larger scale to make up for it?
It’s clear to me that retail sales in North America in Q4 will be down from last year. It doesn’t take a huge crystal ball to predict that outcome.
So what does this mean for you as a real estate investor?
It means that some tenants will struggle to pay rent. I know of several landlords who are now getting eviction judgements against tenants who have stopped paying, depending on the jurisdiction.
Those property owners whose cash reserves are depleted may face a more dire situation. Lenders will face the difficult decision whether to extend forbearance terms or declare the loans to be in default. In my opinion, you need to be hunkering down for another economic winter, amassing cash reserves in order to weather another storm of unknown duration.