Pandemic Ruminations
The pandemic ended at some point in 2022, well not officially according to the CDC, but in my mind it did as signs or normalcy began to reappear. Life as we knew it started to kick back into gear. And those gosh darn facemasks found a permanent new home in my truck’s glove box.
However, the effects continued and still affect us in a major way today.
What has transpired since then - a few highlights:
Inflation started to climb, the Fed incorrectly deemed it “transitory” and then embarked on a massive series of interest rate hikes, paused at 5.25% - 5.5% in July 2023 and is currently playing out their “higher for longer” narrative with a lot of talking and little further action.
After topping out at 9.1%, inflation has since cooled into the 3 - 4% range but not close enough to Fed’s 2% target. Combined with a persistenly strong economy, healthy labor market and robust consumer spending, the gap to their target is stubbornly wide, which means we may not see rates drop anytime soon.
Construction costs remain elevated and continue rising, market dependant. The rate of increase has slowed considerably in the last 12 months from the heyday of average prices nearly doubling from 2021 - 2023.
Banks are timid. Sentiment is mostly in reaction to the April 2023 bank crisis and recession fears. Debt is scarce, rates higher and LTV’s lower. All this adds up to significant risk in the coming 6 - 24 months, especially for commercial real estate loans facing refinance risk. Many loan rates are tied to indeces like the 10Y treasury, not controlled by the Fed and more reflective of larger US issues like gov’t debt levels and policitics. So even if Powell eases on the Fed Funds Rate, we may still see elevated rates for some time in places like home mortgages and variable rate commercial loans.
Money continues to be in abundant supply as evidenced by a ripping US stock market and BTC (also boosted by a recent ETF approval). It’s still very hard to explain cryptocurrency to anyone who asks.
Residential home prices remain elevated in most markets. New supply is scarce. Mortgage rates jumped as high as 8% last year, which surprisingly hasn’t done much to hurt pricing. High interest rates translated into limited transaction volume as the gap between buyer and seller price expectations remains wide with affordabilty a major issue for first-time home buyers. Legacy owners have “golden handcuffs” from sub-3% mortgages. Reluctance to sell, as a result, has never been higher.
Labor never recovered post-pandemic. Shortages and resulting wage spike from inflation and a worsening supply-demand imbalance is roiling many companies. One of the side effects of scare and costly labor is the massive growth of AI. Separately, during COVID, almost everyone discovered the joys of remote working, most decided they liked it and retained leverage when it came to future carerr negotations. Silicon Valley called back many of it’s workers from Wyoming and Montana only to fire them a few months later when interest rates started to spike, valuations crumbled and venture capital disappeared.
E-commerce is alive and well, but not as strong as the days of COVID shutdowns whe people were trapped at home, riding Pelotons and glued to Zoom calls while their kids screamed in the background. Amazon scaled massively in 2022, buiding distributions centers faster than new Starbucks locations, before eventually pausing on growth in 2023. In a sign that the boom may still have legs, Amazon didn’t sell excess space, but instead re-positioned unused warehouse capacity into subleases to prepare itself for future growth in the years ahead.
A few odd supply chain issues remain: electrical components, appliances, etc. Most have ironed out. Shipping is now a political risk. Many of the shipping cost increases are here to stay. Onshoring, re-shoring and just-in-time inventory are the new fancy logistics buzz words associated with reducing dependency on foreign imports and preparing ourselves for more “oh-shit” moments like we saw in 2020 - 2022.
Some commercial real estate markets have slowed significantly, in particular sectors of real estate like office (financing, remote working trends) and apartments (financing costs, softening rents, rising op ex costs).
Politics still matter. Blue states are seeing exodus continue, but at a slower pace. Still not clear what the long-term impact of pandemic will be on these states. Their politicians don’t seem to know either.
What I’m most curious to see is the eventual winners and losers of COVID:
Do boom in-migration markets like Boise, Bozeman, Austin and Nashville keep chugging along, slow materially or just pop like a bubble? Or settle at a respectable place in the hierarchy of desirable cities to live in? From what I see, it’s middle-ground settling effect thus far.
What’s the future of industrial real estate? Is just-in-case inventory a new norm? Did supply chains ever really correct? Can all the e-commerce / distribution space built in the last few years be absorbed or will it sit for longer? Some markets are struggling to absorb Class A. Will small bay continue to chug along as the hybrid profit best suited to meet many of the needs if industrial moving forward?
Can the euphoria around stock markets and BTC last? We’re entering overbought territory. All signs point to a major correction.
What will the Fed do in the face of political pressure during an election year?
What will the next recession look like, and when will it happen? I’m dusting off my crystal ball as I write this last bullet point.
No summary needed. It feels like a lot of certainy stemming from COVID still exists in this world. Two years in and we’re still examining life to see what has changed, what has not and what will be the future of our lives in the decade ahead There’s never been a more interesting time to be a keen obsever of world trends than right now.