While the second stimulus gave the US economy essential support, John Chang, SVP and director of research services from Marcus & Millichap says a third stimulus is even more important.
“If a third round of stimulus is passed, that’s good for real estate,” Chang said in a new video. “If a third round of stimulus is stalled, then we can expect the economy to soften and real estate with it.”
Chang says that the $2.2 trillion CARES Act passed in March was designed to reinforce the economy for four to six months. In the second quarter of 2020, the economy lost 22 million jobs and weekly unemployment claims hit 6.8 million in a single week at the end of March.
“The CARES Act was a critical safety net at the time and it did deliver an economic bounce in the third quarter,” Chang says. “Job losses were stemmed with weekly unemployment claims tapering down to the low 700,000 range and about 12 million jobs were recovered as businesses began to reopen in May and June.”
The downside of the effectiveness of the stimulus was it gave many people a false sense of economic strength. That, along with election year politics, thwarted momentum for a second stimulus, according to Chang.
“Around September, the pendulum began to swing back toward the downside,” Chang says. Weekly unemployment claims pushed back up reaching the 900,000 range, retail sales began to fall again and small businesses sentiment had declined by nearly 8%.”
In the fourth quarter, the loss of momentum became “quite visible,” according to Chang. In December, a second round of stimulus was finally passed. However, the new $900 billion round is about 60% less than the first stimulus.
“It will likely just stabilize the economy and only for a couple of months,” Chang says. “That’s why a third stimulus round is important. It’s likely the vaccine will not hit a critical mass until the third or fourth quarter and the stimulus bridge needs to carry us that far.”
If a third stimulus isn’t passed, Chang predicts there could be a relapse of economic weakening in the second quarter.
While commercial real estate won’t feel the effects of this weakening right away, it will eventually resonate. “The trends move more slowly in our business, but they still generally correlate to the broader economy, especially apartments and retail,” Chang says.
Apartment absorption was soft in Q2. But when the stimulus was fully in the economy in Q3, absorption surged. When the stimulus ran out, leasing activity began to taper again. “We also have to consider that eviction moratoriums are distorting the numbers a little bit and that is going to carry with us for a while,” Chang says.
On the retail side, space absorption hit a trough in Q3 of 2020, but delivering modest gains at the end of the year. Still, Chang says the outlook remains tepid and fragmented geographically and by property type. He says office absorption has been the softest with about 155 million square feet coming back into the market in the last three quarters.
Industrial has been the strongest performer during the pandemic, with e-commerce driving steady absorption.
“The second round of stimulus was late so we saw the economy soften,” Chang says. “It was also too small. Investors will need to monitor the progress of a third round of stimulus as a key indicator going forward.”