It appears the U.S. economy will start to reopen gradually as the quarantine is lifted in some states during the month of May. However, it will not be a simple matter of flipping a switch and life resumes as it was prior to the ‘lock-down’. Many are talking about a ‘V-shaped’ economic recovery and we go back to normal, this condition is commonly referred to as Normalcy bias.
Wikipedia: Normalcy bias is a tendency for people to believe that things will function in the future the way they normally have functioned in the past and therefore to underestimate both the likelihood of a disaster and its possible effects. This may result in situations where people fail to adequately prepare themselves for disasters, and on a larger scale, the failure of governments to include the populace in its disaster preparations. About 70% of people reportedly display normalcy bias during a disaster.
The normalcy bias can manifest itself in various disasters, ranging from car crashes to world-historical events. It is hypothesized that the normalcy bias may be caused by the way the brain processes new information. Stress slows information processing, and when the brain cannot find an acceptable response to a situation, it fixates on a single and sometimes default solution. This single resolution can result in unnecessary injury or death in disaster situations. The lack of preparation for disasters often leads to inadequate shelter, supplies, and evacuation plans. Thus, normalcy bias can cause people to drastically underestimate the effects of the disaster and assume that everything will be all right. The negative effects of normalcy bias can be combated through the four stages of disaster response: preparation, warning, impact, and aftermath. Normalcy bias has also been called analysis paralysis.
Here are some new trends we believe will create a ‘New Normal’ for the operation and lower valuations of Commercial Real Estate:
Travel restrictions and bans – hotels will continue to experience dramatic drops in occupancy and reduced RevPAR.
Supply Chain disruptions - businesses that utilize Asian supply chains will experience shortages and delays, many will be forced to curtail or close their operations. This will reduce the need for space, increasing supply and lowering rents.
Social Distancing – will severely impact most offices, hotels, restaurants, gyms, retail stores, entertainment venues, etc. There will be increased cost incurred by owners and tenants in order to comply with the new rules. Many operations will not be able to operate profitably leading to closures.
Depression Level Unemployment – decrease in consumer spending and changes in consumer behavior will force many businesses to cease operations.
Financing – Lenders are tightening their underwriting requirements, requiring additional equity, and reevaluating their risk exposure. This will lead to fewer transactions and lower sale prices for owners when selling.
Some estimates indicate that there could be a loss of several thousand CRE transactions this year and a loss of over $100 billion in volume. Markets that have the highest exposure to tourism and stricter social distancing and containment policies will experience the biggest drop in valuation.