How the Coronavirus Pandemic Compares to the Great Recession
- By walther.alvarez
- April 15, 2020
The far-reaching impact of the COVID-19 pandemic is being felt across countless industries including commercial real estate. Such unpredictability in the market is causing many to draw comparisons to the Great Recession of 2008, which significantly devastated the housing sector and commercial real estate. While some expect the current coronavirus crisis will have consequences similar to the 2008 recession, others predict this economic downtown to follow a different pattern with a shorter timeline.
To better predict how COVID-19 will affect the U.S. economy, it is helpful to have an understanding of how our current situation compares to the Great Recession.
The Great Recession and the coronavirus pandemic can be compared by how they originated. An overbuilt supply of real estate (office, retail, industrial, and housing) saturated the market. In addition, aggressive and loose lending practices further exaggerated the problem. Essentially, developers became speculative and banks approved high mortgage amounts. When CRE and home prices started to decline, many investors and homeowners were unable to make mortgage payments and lost their real estate.
Furthermore, the Great Recession impacted all of our country — resulting in wide-spread layoffs both inside and outside the real estate sector. All of the above led to a giant decline in consumer spending and bank lending freezes.
The coronavirus pandemic, on the other hand, originated in a Chinese open market. As the virus started to spread throughout the globe, it eventually extended to the United States and has been growing throughout the country ever since. Unlike the Great Recession, there were not any significant foundational issues looming in the American economy. In actuality, our current economic woes were an abrupt halt to what was a fantastically strong economy. Many industries have been impacted by the pandemic, but most notably are restaurants, hotels, and the travel and tourism industry.
Both the Great Recession and the coronavirus pandemic have impacted many areas of the economy. However, certain sectors are staying strong despite the growing coronavirus concerns. For example, household debt is at a historical low of 96% of GDP, which is far better than 2008 — in which household debt was 134% of GDP.
Job losses are another comparable factor. In 2008, unemployment more than doubled — reaching 10% — as the country had roughly nine million people unemployed. According to Harvard University economics professor and formal treasury department official Karen Dynan, unemployment, after jumping to 20% in the coming months, is anticipated to be in the single digits by end of 2020 and 6% in 2021.
The 2008 recession saw a large stimulus package that offered tax savings and credits to many individuals and companies. It also provided funding for healthcare centers and schools. The latest stimulus package is currently geared toward aiding the highly impacted travel industry, as well as households battling unemployment and income loss. Both recessions are receiving serious government intervention.
By contrast however, we expect the 2020 economy to recover much more quickly than the Great Recession. In fact, many experts anticipate the “pent up demand” created by this government caused recession will allow the economy to bounce back with tremendous strength.
Commercial Impacts of a Looming Recession
It has been speculated that the downturn caused by coronavirus will follow a “V” shape in which there will be a period of economic decline followed by economic growth. During the decline phase, however, certain economists believe that the economy will decrease at rates of 5% or 10% in the second quarter. The worst decline during the 2008 recession was roughly 8%.
Unlike many other industries, the commercial real estate market changes slowly and is not as vulnerable to sudden economic fluctuations. At the moment, there is an unexpected strain of tenants suddenly not paying rent and cash flow shortages making it difficult to pay mortgages. However, it is believed that most commercial assets will recover by end of summer, except for those hardest hit like hotels. Of course, if the government continues to enforce lock downs through the summer, the COVID-19 pandemic will cause long-term economic damage and the commercial real estate sector will face a downturn of its own. Notwithstanding, the most effective way to prepare for and navigate any economic change is to partner with an experienced real estate broker.
Whether you have tenants not paying rent, delinquent mortgages to resolve, vacancies to fill, commercial properties to transform, or investments to secure… the professional team at Acquisition Consultants is here to help you make the best commercial real estate decisions. Our network of knowledge combined with our over 25-year history allows us to uncover, negotiate, and recommend optimal tactics that fit the state of the market and the specific property. For more information or to get in touch with one of our real estate experts, contact us today.