The unanswered question now is: Where do we go from here? The answer is hinged on three issues at least: (1) Can a second wave of accelerating infections after the travelling and summer holiday season be avoided? And if not, will regional and partial lockdowns be sufficient to contain the virus? (2) Related to this, is the question as to whether a medical treatment and vaccine will be available. (3) If our economy is revitalized, will the strength of the economic recovery be sufficient to restore the real estate investment markets?
The combination of a fear of infection, public guidelines, mandatory lockdowns and great uncertainty produced a sharp deterioration in economic activity with a deep and widespread shock to our labor market. An unprecedented number of workers (39% on average reported by the Organization of Economic Cooperation and Development (OECD)) shifted to telework, pushing the boundaries of the potential for this alternative way of organizing work.
Our jobless claims surged to around 6.9 million at the end of March. The weekly average of initial jobless claims now stands at approximately 3 million, as indicated by the US Bureau of Labor Statistics. This labor market trend is reflected in an US unemployment rate of 14.7% for April. In July, as some lockdowns were relaxed and people returned to their jobs, the unemployment rate dropped to 10.2%.
But the gap between the pre-crisis level and the current level of real estate activity is still very wide. With the resurgence of new infections, consumers have become more cautious and are avoiding restaurants, shopping areas and entertainment events. In addition, the vast majority of plans by states to relax the containment measures have been suspended or new restrictions are even being imposed. This also reflected in the industrial production number for July, which declined from approximately 5.5% in June to around 3.2% in July, indicating that economic activity appears to be plateauing.
Given the heightened uncertainty about the longer-term impact of the disease on the real estate markets, we still, however, prefer lesser cyclical real estate markets, such as residential income, but are keeping a hold designation on most multifamily markets . This integrates a sharp earnings contraction for the second quarter 2021 based on calstatecompanies Market Cycles research, with a lukewarm recovery during the third and a likely acceleration into the fourth quarter. And it compares with 2008/2009 during the Great Recession where earnings retreated on a similar scale. It is therefore fair to assume that we will have strong earnings momentum building up going into 2021, as seen in the aftermath of the financial crisis
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