A Little Help from My Friends: Stimulus, Vaccines and the 2021 Economic Outlook

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Spencer Levy
I'm Spencer Levy and this is The Weekly Take. What a week it's been. Americans turned out in record numbers for a historic presidential election. And just days later, a Pfizer vaccine trial made headlines with highly positive results for a potential COVID-19 preventative. On this episode: hope and change. Hope for a vaccine that is, and likely change at the top and how it all factors into our economic outlook for the year to come.

Richard Barkham
We've got divided politics as the stock market is telling us right now. That’s quite good for the business environment.

Spencer Levy
That CBRE’s Global chief economist Richard Barkham, the lead author of a new report, CBRE’s 2021 U.S. Outlook. Richard joins me to discuss the impact of Joe Biden's likely election as America's 46th president and divided government. We’ll consider lingering uncertainties. And above all, with that promising news about a vaccine will analyze what current events mean for the country, for the economy, and for the commercial real estate business in particular. That's right now, on The Weekly Take.

Welcome to The Weekly Take, I'm joined by my friend and colleague, Richard Barkham. Richard, welcome.

Richard Barkham
Thank you, Spence. Absolute pleasure to be here.

Spencer Levy
To put this conversation in context, we're speaking at the end of election week. Richard, easy question to start. Tell us exactly what's going to happen and what does it mean for the economy?

Richard Barkham
Exactly, Spence? To the day, to the minute? We're really good in CBRE research. I'm not 100 percent certain I can be that precise. But Biden has won the election by a close margin, closer than many people thought. But he will not get the blue wave that again was predicted by many people and indeed priced into the market. So we end up with a divided politics, divided executive and legislature. So I think as the stock market is showing us, actually that's a political environment because there are no radical policy departures that business people quite like. It allows business to get on with the job.

Spencer Levy
But let's now go to our commercial real estate forecast. Where are we right now, Richard? And where do you think we'll be in 2021, in the U.S. and globally?

Richard Barkham
We're still looking at a pretty negative 2020 with about minus four percent GDP growth. But I think we're looking at the reverse of that in 2021, somewhere between four and five percent GDP growth in the United States and much higher in the world more generally. And that comes on the back of our assumptions about an almost immediate deployment of a vaccine and continued economic stimulus building on the consumer recovery that's already taken place.

Spencer Levy
Well, let's talk about the vaccine. And I hesitate to talk about medical issues, but we have to because it's going to have a enormous impact on the economy. I did hear some good news from you, Richard, earlier today that the vaccine seems to be progressing faster than a lot of people thought. What's going on?

Richard Barkham
What we're hearing, Spence, is that it's already being deployed in hospitals around the United States in advance of it being licensed. And we think it will be licensed in December and deployed with care workers immediately in Q1 and then rolled out more broadly in Q2. If there's a little bit of a glitch in that, I think it's that the Europeans will be more cautious. It's unlikely to be deployed until Q2. So the rollout program will take longer. And I think the European economies are going to take a bit more of a hit in Q4 of this year and Q1 of next year as the virus levels soar in that region. But for the United States, it's a pretty encouraging story.

Spencer Levy
Well, speaking of encouraging, let's talk about an area that has been discouraging for the last six months or longer, which is simply travel, travel, not just between cities, but between countries. Any outlook and when that might get back to not necessarily normal, but a lot higher levels next year

Richard Barkham
It has to be post COVID vaccine, I think. It has been trending up a little bit, but we need to see that vaccine deployed. So that revival in travel, I think, is end of the year weighted likely to come through in late Q2, Q3 and Q4. I think generally speaking, though, it's going to take 24 months at least from there to catch up to where it was prior to COVID-19. That puts a proper full recovery all the way through into 2024.

Spencer Levy
Well, I guess the good news in a global economy with a huge percentage of it being services, a lot of global trade was still taking place notwithstanding the travel restrictions. But I did notice skipping ahead very briefly to commercial real estate. We've even seen quite a big uptick in foreign investment in the U.S., even in the face of being unable to travel here. You expect that to continue? And why do we see so much foreign money coming here?

Richard Barkham
I think there are two things. I think people are getting over the idea that they need to visit a property in order to to buy it. And we've seen that in London properties transaction. But I also think it's a good opportunity as well. Up until the COVID-19 crisis, we had a relatively strong dollar and relatively high hedging costs. Now we've got a very advantageous currency situation. So we never know. Forecasting currencies and hedging is a mug's game, always has been. But what we do know, therefore, is that the right thing to do is to act when you get a good currency opportunity. And I think that's what investors are doing right now.

Spencer Levy
One of the things that has positively surprised us early on, really in September and August and now following in October is the strength of the consumer at or above record levels of spending. How is that possible?

Richard Barkham
It's indescribably unusual, Spence, but I think you have to look at the government spending there. You've got government spending like it was wartime and all of that money, it's not going into investment. It's going directly. To supporting the incomes of consumers, so in Q2 and Q3, American consumer incomes actually rose, and I think that has supported the really strong revival in consumer spending. Retail sales are higher now than they were pre COVID-19 and car sales are up, too. I think it's all to do with government spending that's caused that, Spence. And I think with a further stimulus package, I can't see why that won't continue, even if the virus is trending up in the United States.

Spencer Levy
Well, let's talk about the consumer and let's again jump ahead to real estate in retail. Retail has obviously been very challenged the last six to nine months and obviously had some structural issues before that related to restaurants and experience more recently. But also there's been some high profile bankruptcies. Is that a green shoot for bricks and mortar retail that we're seeing so much consumer spending?

Richard Barkham
I believe it is Spence. It's an unusual situation. We've clearly still got the challenge to retail coming from internet penetration. But you've also seen this uptick, this really a surge in retail sales. And you also have a situation, I think if you look at history, where after you get over a crisis, there's a release of energy. People go out, they they party, you know, they do things. They spend money in ways that they otherwise wouldn't do. So do I think that's going to be one of the surprises of 2021, a real positivity around the bricks and mortar retail that we haven't seen for some years, frankly.

Spencer Levy
So you would agree with the term that our friend and colleague Henry Chin coined, which is ‘revenge retail’ people want to go out and spend and maybe an unusual luxury things.

Richard Barkham
I would call it more relief retail. You know, once the pandemic is over, it's just a sense of relief. And you can see it in history over many episodes, the way in which the 1920s, for instance, you know, came out of the pandemic in the 1918 and the First World War. You saw it in other events as well. But I think it's something to watch out for.

Spencer Levy
The other thing I'm watching out for is just good old fashioned value. And what that means to me is that you price things low enough, people are going to do it, and that would include getting on cruise ships and other things that right now seem so foreign to us. How much is the consumer drivable by value?

Richard Barkham
As an economist, you have to say price is the ultimate motivator. So, you know, I think in the retail and leisure industry, you're going to see some great deals. We've seen it in Q3, even when we've had a lot of restrictions on. But I think a combination of that relief and the need for the hotel and lodging industry to get back on its feet is going to lead to, you know, a surge in I wouldn't be surprised if cruises, which I note just been allowed by the FTC to kick off again or set off anyway. That's another part of the consumer led relief rally that I think it's going to continue into 2021.

Spencer Levy
So let's turn now back to the election and the stimulus in particular. I think it's fair to say that our forecast was largely baked free election, but it does have some levers which could move it up or down depending upon, among other things, the amount of the stimulus. So what are we thinking for the amount of the stimulus and how might it impact our forecast for the U.S.?

Richard Barkham
OK, so we come to politics, we come to the US election. And I think, you know, our view is at the moment that the Biden is going to win the election. We could still be wrong. We don't fully know, but that he's not going to have control of the Senate. So any idea that we've got a three trillion mega stimulus is just off the table right now. So that places, I think, the stimulus somewhere between one trillion or two trillion, depending on whether there are two stimulus packages, one that comes immediately after the election and then another one in the new year. And it also depends a little bit on Biden's political skills in kind of working with Republicans in Congress to get that through and, you know, any prestige that he carries with him from winning the election. We do think that longer term, the fiscal hawks are back in play in Congress. If we see there as we believe the virus defeated in 2021, then I think we get one fiscal stimulus in the next couple of quarters amounting to about two trillion. And that should be enough to see us through into the full recovery that materializes from Q2.

Spencer Levy
Well, maybe now is not the time to worry about what I call the other I word, the word that everybody talks about as interest rates. But the other word is inflation. But good, good God, we put, what is it, seven trillion dollars into the economy. Now, if you were to include the new two trillion dollar package when you combine fiscal plus monetary plus new fiscal, have we just unleashed inflation on the US economy?

Richard Barkham
I think we might actually see one or two hints of that over the next six months, six to nine months, partly because of what I was talking about earlier, just the the strength of demand feeding through into manufacturing. You just might see some good price inflation there. But we haven't unleashed a general inflation in either 2020 or 2021 because, you know, we've still got a lot of excess capacity in the global economy. And a broadly speaking, supply side is ahead of demand side. You know, central banks, including the Fed, have done more in three months to expand their balance sheets than they did in five years of the great financial crisis. So who knows where this takes us after two, three, four or five years? I mean, I think we've got a lot of liquidity sloshing around the system as well as some other structural factors. And it goes back to the, you know, the reshoring of manufacturing activity. One of the reasons we exported manufacturing activity was to get cheap labor costs. If you reshore manufacturing activity, you're bringing it back to a slightly higher cost locations. So that's one factor that I think is, broadly speaking, pushing us towards inflation. The other one is China. China won't be able to rely on its exports to grow anymore. So it's going to have to stoke up its consumer economy. And that's adding a big chunk of demand to the global economy. So I think over three to five years, we might be looking at not rip roaring inflation as we had in the 1970s, in the 1980s, but more of a two to four percent inflation zone rather than the one to two percent inflation zone that we've had over the last 10 years or so.

Spencer Levy
Well, let's play a little parlor game here for a moment. I now want you to guess where the 10 year Treasury is going to be at the end of 2020, at the end of 2021. And why?

Richard Barkham
So I would probably say that the 10 year Treasury will end the year. You know, I think there's still with the virus flare up in Europe, we're heading into a more risky rather than less risky situation. So I think the 10 year Treasury, you know, probably 70 bips at the end of the year. But I think as we come out of the crisis and the economy gains strength and governments around the world deploy stimulus, then I think we're probably looking at a 10 year treasury in 2021, about one point one percent, something like that, maybe 40 bips on on the 10 year Treasury. It's not it's not rip roaring away, but it is you know, that rate will rise.

Spencer Levy
Well, for the first time, Richard, I'm going to take the other position now. And the reason is this is I think that once we're past this next couple of weeks people are going to see that the economy is increasingly in good shape. A lot of stimulus and a relatively stable government, which leads me to believe that the 10 year will be at one percent by the end of this year and will be closer to two percent by the end of next year. So I'm in the very optimistic growth camp because of stimulus and stability, and I'm normally the guy who's pushing down interest rates. But at the same time, I'm also the guy who believes that cap rates are low and they're going to potentially get lower. What do you think, Richard?

Richard Barkham
Well, on cap rates, I tend to agree Spence there I said. There's still a very attractive spread in real estate. I mean, one of the really surprising things about the current crisis is just how resilient, given we've had the biggest economic shock in 100 years and we've hardly had cap rates moving at all. So cap rates have been kind of super resilient. So it's you know, if they're super resilient in the point of a crisis, then they're only going to trend down, I think, when that crisis alleviates. 

Spencer Levy
Let's now skip ahead to the major asset types in our actual forecast. Let's just take it from the top. Office, where is it going to be in 2021?

Richard Barkham
I think we're going to see vacancy rates continuing to trend out in 2021. Headline rents have been relatively stable so far. And what seems to be increasing is the level of incentives for tenants to occupy space. But I think over the course of 2021, we're going to see headline rents easing down. From Q2 and Q3 I think we'll begin to see leasing pick up again. It could well pick up more strongly than we think because companies will reactivate plans that were deferred for the last 18 months. But I don't see that pick up in leasing activity in Q3 and Q4 really substantially impacting on headline rents until the end of 2022 or possibly into 2023. So we have a period of falling rents, rising incentives in the office sector, but curiously enough, relatively stable cap rates. It might well be worth noting that the bounce back could be stronger than we think. So companies might be looking at the next six to nine months, potentially as the sweet spot to really do very advantageous deals on quality space in the primest locations in the world. So just just keep that in mind.

Spencer Levy
Well, Richard, I am not to push you back too hard here, but I will say there were many things that we have forecast and the five major food groups that were too optimistic. And there were some things that were too pessimistic. And I think that in the office asset class, perhaps we were a little bit too optimistic about the speed of the comeback because I don't think we were counting on it being dependent upon a vaccine. We thought there would be something more along the Asian model of testing, tracking technology, but we maybe were a little bit too optimistic there. Looking back to our original forecast in March. But that said, if you're seeing the best office assets in the U.S. today, when I say the best, I'm defining the best by great markets with long term credit tenant leases for some of those assets I am directly aware that we are getting values that are pre-COVID today and many of those bidders are foreign. So isn't that a bet on the future value of office?

Richard Barkham
Yeah, totally agree. And a well-placed fact, in my opinion. As I say, we may well have been a little bit optimistic. So I've pushed out in our forecasts any form of leasing revival for two quarters, and that takes the leasing revival through to Q3 and Q4, probably substantially materializing in Q1 2022.

Spencer Levy
Well, at the risk of dominating the rest of this episode with this one question, I do have to note that in your forecast you have a area which is called the secular shift in demand for office use, and that relates to work from home. That relates to other factors that say people are going to be in the office less. Are we any clearer today on what that secular shift is going to be than we were a few months ago? And what will give us that clarity?

Richard Barkham
I think we are a little bit clearer. I think the experience of the COVID-19 crisis has accelerated the remote working technology extremely quickly. So I think what we're going to see is companies deploying much more hybrid strategies with people working out of many locations. We were probably at a figure prior to covid where maybe 60 percent of people worked in the office five days a week. That could easily drop to only 30 percent of people working five days in the office. Does that actually translate into a reduction in demand for space? Well, not necessarily, because, A, there'll be a certain amount of densification, I think, in the marketplace. The wellness concerns will persist after the crisis has been eliminated. And even if we see the COVID-19 being largely solved in 2020, it won't be completely eliminated. There will be some sort of virus management. So I think we'll have some de-densification. And I think the new kind of working as well. It's not people sitting at desks, it's people working in teams. It's people working in event space. It's people working in teams space. And it is also offices with a much higher level of amenities. We might have people working more remotely and more flexibly. That doesn't necessarily translate into a lower level of overall demand. And one final thing before you chip in, you've got to remember people are seeing all this remote working and thinking decline in demand for office. But under any circumstance, the number of office-using jobs is going to be increasing quite sharply in the next five years. So the secular drivers of demand are still in place.

Spencer Levy
Let's skip now to another asset class where I'm not going to go so far as to say we were too optimistic, but I think we were too optimistic in a segment of it, which is multifamily now. Multifamily, you should all be aware, was our number one asset class idea in the CBRE 2030 Age of Responsive Real Estate report, which came out just prior to the crisis, now known as The Way Forward and multi-family, has performed well during the crisis in suburban areas, but it has performed very poorly in CBD areas, particularly those dependent upon mass transit. So, Richard, were we too optimistic or too pessimistic?

Richard Barkham
I don't think the issue is necessarily to do with mass transit in the big cities. I think it's you know, big cities are very expensive places to live there. And people will do that when urban amenities, you know, when they've got the theaters open, when they've got lots of great restaurants to go to. And I think the fact that the COVID-19 closed up all of those urban amenities means that people don't want to pay a high central city rent when there are no urban amenities. I think when urban amenities come back, then I think you'll see those multifamily markets picking up again quite quickly. I think, frankly, they did get a little bit expensive. And it may be that they they don't bounce back to the pre-COVID rents. But I think once you see the vast array of interesting things that you can do in the city coming back, then the future is reasonably bright for those big city multifamily apartments. I would worry a little bit as well. We've noticed that with multifamily rent collections, they've been way more stable than we ever thought possible. So I don't think we were overoptimistic there. In fact, I think we may have been too pessimistic on rent collections. If there happens to be no stimulus or we don't get that generous unemployment support going in in Q4 and Q1 next year to see people through this period of high unemployment, then I think that might filter through into weakening rent collections in some of the multifamily that caters for people on median incomes, and more moderate income. So might be still a little bit of a hiccup in some of the those types of multifamily assets.

Spencer Levy
So let's skip ahead to the next asset class: hotels. What's going to take for the hotels to come back and when will they come back? What is our forecast say, Richard?

Richard Barkham
This is the weakest area of real estate right now, hotels. And, you know, we have seen a little bit of revival of the hotel sector that caters for domestic leisure, the hotels that are drivable to from American metros. But the big full service hotels that cater for the business clientele, particularly the traveling business clientele, have been absolutely whacked by the crisis. And I think their trajectory for recovery is probably similar to the one I mentioned for the airlines, which is pretty slow. Maybe start the back end of 2021, picks up in 2022, but isn't really getting back into its stride until 2023, and not fully recovered until 2024 or so. And we are actually seeing, you know, certain hotels that they're actually closing for good. It's a very hard hit sector. It's interesting to note that China, which has managed to suppress the virus very quickly and very effectively, its economy is back up and running quite nicely. It's almost up to pre-COVID occupancy in hotels. So it may come back quicker than we expect. But at the moment, hotels not till fully recovered till 2024.

Spencer Levy
Let's skip ahead now to the alternative sector, Richard. And the alternatives are things like life sciences, cold storage, data centers, medical office. They seem to be red hot. Why?

Richard Barkham
Let’s go to life sciences. It is red hot. There's no getting around it. Life sciences is absolutely red hot. And I'm sitting here in Boston, you know, at the kind of epicenter of life sciences. It's tempting to say that it's as a result of the COVID-19 crisis, all of this investment in health. But I don't think it's that, I think it's really goes back to when people cracked the genome code and people started mapping out genetic characteristics and exploring the gene. And that has just opened up so many opportunities for new therapies.

Spencer Levy
I want to end this podcast on a positive, optimistic note. What makes you most optimistic, most positive about 2021, knowing we're going into a year with the pandemic still exists?

Richard Barkham
It is the good news that we've been hearing on the vaccine. It's an extremely remarkable story. And I think it's testimony to the real vigor, inventiveness. It's not just in the United States, but a lot of it is in the United States around the medical and the pharmaceutical industry. But it's also it's the kind of human spirit as well. It's just really incredible how optimistic and kind of raring to go the American people have remained even in the tooth of this kind of political turmoil, the can do attitude of the Americans, I think is really remarkable.

Spencer Levy
So on behalf of The Weekly Take, I want to thank my good friend and colleague, Richard Barkam, global chief economist, America's head of research. And I may have missed the title there, but a tremendous friend, a tremendous mind in the business. Please take a look out for the CBRE’s 2021 Outlook for commercial real estate in the United States, which is going to be published shortly. Thank you, Richard.

Richard Barkham
Thank you, Spence.

Spencer Levy
For more on our show, check out CBRE.com/TheWeeklyTake. You can also find the report that Richard and I just talked about: CBRE’s complete 2021 U.S. Outlook forecasting the year ahead. And soon, an in-depth analysis of the election's impact led by CBRE’s Americas director of research Darin Mellott. We'd also love your feedback. So if you found us on Apple podcast, Spotify or another platform, please subscribe rate and review us wherever you listen. Once again, thanks for joining us. Until next time. I'm Spencer Levy. Be smart. Be safe. Be well.