I want the dinner check and it cannot come fast enough. Add the tip, sign, and run the card. I want 2020 to be over.
Unfortunately, it will not be that easy. The COVID-19 virus will be with us for at least the first half of 2021, but what I am really thinking about is the long-lasting impacts of the behavioral changes and financial impacts on our economy. What had been thought of as changes that would be glacial are now tsunamis.
The first one that comes to mind is real estate. In some ways, the timing of the virus was perfect. Most of the business world had already or was in the process of moving their computer functionality to the cloud. The beauty of the cloud is that you and your entire team can work from almost anywhere and your desktop can be identical to your desktop in your office. All you need is a phone and internet, and you can be out of your high-rise office building, out of the urban area, and away from traffic. The cloud was going to happen anyway, but COVID-19 accelerated that change, and the long-lasting impact will likely result in companies reducing their office square footage footprint. National studies indicate that companies are looking to reduce their office real estate by 15%-20% post COVID-19.
This will be an enormous change and completely disruptive to the traditional office real estate market. It will take years to absorb the changes. The losers will be urban core real estate. Sub-markets like Boise, Spokane, Missoula, Las Vegas, and others that offer lower cost of living and lower tax rates will see inflows of capital, people, and companies. As a fundamentally oriented firm, we scoured our portfolio holdings to identify those companies which have outsized exposure to urban office real estate and either reduced the holding or sold it out of the portfolio.
The younger generation of millennials, Generation Y, have up until this point had an outsized impact on parts of our economy. They like living in urban areas, preferred living in apartments to buying homes, saw little point in owning a car, might have a significant other, but marriage and having children was not a priority. Fast forward to COVID-19 – they are moving out of the urban centers. Current data shows car sales are at record highs, home sales are on fire and in a few years this generation is going to wake up on a soccer field with their fold up chair, Starbucks in hand watching their little ones run around in the rain, with the days of drinking IPAs at the local downtown brew pub turning into a distant memory.
This group, who traditionally viewed the stock market as something for their parents, started investing and putting some of that $6 IPA money into the market. They are young, invincible during a pandemic, and now because they are tech savvy and have had time on their hands, came into the market in droves opening accounts at places like Robinhood or Charles Schwab. Their favorite stocks were the ones they use – Amazon, Google, Facebook, Apple, Netflix. This was largely disruptive in the markets and some would argue created a bubble in valuation in some areas.
What does all this mean? In the short run, it is better to be a tenant than a landlord in a large, urban city market. It’s better to be a seller of a home than a buyer. And for the first time in a recession, it is ok to be a car dealer, to stay focused on earnings and balance sheets and there are way too many brew pubs.
Lastly, states or cities with high taxes are in for a competitive fight. COVID-19 has created mobility. New York City, Chicago, Portland, and San Francisco may not be as desirable as Idaho, Montana, Tennessee, Nevada, and Florida. Sanford Bernstein moved out of New York. Goldman Sachs’ asset management arm is considering moving out. If the iceberg melts, this might become a tsunami. Can I get the check?