Thursday, March 12th, the S&P 500 and the Dow Jones Industrial Average had the biggest one-day percentage drops since October of 1987 — and the Nasdaq joined the Dow in bear-market territory, which is commonly defined as a drop of at least 20% — as fears of the coronavirus grow, coupled with oil wars and uncertainties around the 2020 Presidential election.
Then on Friday, President Donald Trump declared a national emergency due to the rapid spread of the coronavirus in the US. Soon after, stocks started to rally in late trading. These are scary, volatile times. What does it mean for real estate investors? The record-setting 11-year bull run for stocks has come to a screeching halt. Is the party over or is this just a temporary hiccup? Or cough?
Today’s guest has been on the Real Wealth Show before sharing his insights on the strongest U.S. markets for residential and commercial real estate.
John Boyd is Principal of The Boyd Company, which was founded in 1975, and provides real estate and management counsel to leading North American banking and financial services companies. Clients include Boeing, Chevron, JP Morgan Chase, Visa International, Pratt & Whitney, PepsiCo, UPS, and other Fortune 500 firms.
Kathy Fettke: Welcome back, John.
John Boyd: Kathy, it’s great to be with you again.
Kathy: We had so much good feedback from the last time you were here when we were talking about what’s going on in different U.S. markets. We have very different topic today because a lot is going on in different U.S. markets, but maybe not so much what we were planning the last time we talked.
John: This is quite an interesting time that we’re in with what we’re seeing in the markets.
Impact on Stocks, Real Estate
Kathy: Now, obviously the stock market has been very affected by news of the coronavirus and, of course, the oil wars. We may be looking at draconian measures where people won’t be able to leave their home. I don’t know if it’s going to get to that. What we do know is that things are really going to slow down over the next month, and maybe much longer. The question is, how would that affect the stock market moving forward, and more importantly for our audience, real estate? What are your thoughts? I know it’s too soon to tell, but what’s your gut say?
John: Well, we’re in the middle of the worst stock market crash since 1987. Last week, $6 trillion have been lost. We’ve lost virtually all the gains made since Trump took office. This is really a supply side of the equation issue for most industries. As products manufactured in China become more scarce, our economy is dealing with supply chain disruptions. We’re seeing retail stores with inventory shortfalls, manufacturers without necessary raw materials and component parts.
Homebuilders, they’re affected; roughly one-third of all building materials are produced in China. This supply chain disruption is really causing a severe economic slowdown, reduced hours, reduced incomes, layoffs, even bankruptcies. On the housing sector, the impact is not really on the supply side, but on the demand side. It has to do with tanking incomes, layoffs, and a real hit on our nation’s housing market.
Kathy: That’s what you projected or that’s what you’re already seeing?
John: That’s what we’re seeing. We’re seeing a lot of projects, planned projects, not move forward because of all of the uncertainty and because of the real hit happening right now, this very strong action economic slowdown. What we have done is we actually have identified three markets that we projected would be impacted the most; the housing markets that we projected would be impacted the most by the coronavirus economic slowdown.
Metros, Industries Hurt by the Coronavirus
The first are tourism-driven cities or international gateway tourism cities like Las Vegas, Orlando, Miami, and New Orleans.
The second are energy-driven cities. You mentioned the oil situation, and of course, the global decline in demand for oil. We saw a 30% drop in oil prices. Cities like Houston, Oklahoma City, and Tulsa. Also, smaller secondary energy cities like Western Pennsylvania, which is a burgeoning fracking industry, southern Ohio, Colorado, and Indiana are also markets where fracking is widespread. Those markets we expect to see a hit as fracking becomes more cost-prohibitive.
Thirdly, financial services-driven cities. Major banking hubs like New York, Chicago, and Boston, along with secondary banking markets like Charlotte and Jacksonville I think are going to bear the brunt of the Wall Street collapse. We saw the Dow drop 15% over the past two days alone. Executives won’t be getting the huge bonuses they expected just a few weeks ago, that will surely play into the housing market as well.
Kathy: Well, that was gloomier than I expected. These are things I anticipated, I just didn’t know that we would be seeing it so quickly. What a Black Swan event. Just in January, I was giving my 2020 predictions saying, “Yes, everything looks great, as long as we can keep the game going but it could stop at any moment for any reason.” Here it is. I did not see this one coming. Now, I look back and go, “How could I have not seen this one coming?” That’s how Black Swans usually work, right?
Black Swan Jolt to the U.S. Economy
John: That’s right. This really did catch us by surprise. Fortunately, the fundamentals are strong. The last February jobs report we saw was very, very positive. That’s an endorsement, I think, of the administration’s pro-business policies, the cut in the corporate income tax rate, other types of regulatory streamlining that have made this nation more competitive for business.
This is an issue that needs to be dealt with. Hopefully, it’ll play out sooner rather than later, and we’ll see economic recovery that I expect to see happen. Until then, there are some tools available. It would be nice to see lawmakers work together and do some of the things like a payroll tax cut, and some other things that Trump is proposing.
Kathy: Do you think there would be an impact with the payroll tax cut? If you’ve lost your job, that doesn’t help you.
John: Any type of stimulus to get money back into the economy right now, I think, would be a net positive. I also wouldn’t be surprised– Later today, Trump is expected to declare a national state of emergency. A lot of industry analysts, a lot of executives, a lot of people that I work with are viewing that as a potential predicate for suspending trading, similar to what we saw in the wake of 9/11. I don’t think that would be such a bad idea either, to take a moment to collect our breaths here and resume trading in a series of days or perhaps a week. That’s something also, I think, that’s another tool available to the administration along with the stimulus package or the payroll tax cut.
Kathy: Where is a safe place for your money right now?
Financial Safety in the Midst of Volatility
John: Versus the very volatile stock market, of course, a lot of people don’t want to invest in bonds, housing and real estate continues to always be a safe place versus the highly volatile stock market. I think there are a number of exciting places to put your money in the real estate market. Just be cognizant of this era that we’re in right now. With the 24-hour news cycle, this supply chain-driven global economy, it’s likely that the coronavirus, we will recover.
It’s likely this won’t be the last time we see something like this. Bioterrorism now is etched in the business planning activities of institutional investors and hedge funds that invest in real estate. These are things that our nation will come to grips with.
Virus Creates “A New Normal”
Kathy: Do you think this is going to change our behavior forever; meaning we’ll be staying home more, doing more online meetings? The last two years, I’ve been on airplanes more than I’ve been home, and that’s what happens in a booming economy, right?
John: I agree. That’s a great part of this that you mentioned. I think the coronavirus is likely to speed up the automation trend and the move towards a more automated workforce. I think it’s going to also accelerate the pace of the remote workforce. That will have tremendous real estate implications, where projects will be getting smaller. That plays, of course, into the gig economy. It’ll create a platform for new legislation to make the lives of gig employees and remote workers better and more financially stable.
Kathy: It’s just always important to look at the opportunity. There’s always opportunity, no matter how bad things get.
John: The common denominator among successful cities today that are attracting banking industry and healthcare industry are highly regarded automation programs. Major universities that are leaders in computer science for artificial intelligence. That has tremendous implications in the real estate industry. I expect advocates of major cities, the people vested in a quick real estate turnaround, to begin promoting artificial intelligence resources as a way out of this, and a way to mitigate a lot of these concerns.
Kathy: I could have a lot of haters for even mentioning the environment or climate change. People have such strong opinions on that. I just also wonder, as we see the difference when we look at maps, and we see less planes flying and less factories. It’s been better for pollution too. I mean, I wonder if this will change the way we do business.
Pandemic Slows Pollution, Highlights Climate Crisis
John: I believe that it will. Lawmakers on both sides of the aisle in states like California and states like Florida are slowly coming to the realization that climate change is a thing that needs to be dealt with, especially if– Some of the nation’s most influential business leaders that own second homes and prestigious zip codes on the beach, whether that’ll be Malibu, Miami or Palm Beach, have a personal vested interest in the climate change issue. It’s also a platform for lawmakers to work together for much-needed infrastructure upgrades.
Kathy: Yes. I don’t know if you saw the photo images of China and the difference in pollution when factories were shut down versus when they’re operating, it’s fascinating.
John: Yes, that type of image is striking. It’s a great illustration of this global economic shutdown and slowdown that we’re seeing.
Kathy: Also, maybe some of the pollution we weren’t seeing until now.
John: Right. Well, I agree with that.
Kathy: [chuckles] Again, touchy subject, a lot of people get really angry when I even mention climate change or the environment. Why do you think that is? Why do you think people are so emotional about it?
John: I think that there’s a reasonable view that many Americans have that there’s really no way to legislate or tax or regulate your way out of a climate crisis. I think a lot of smart people think that the answer really is new technologies. The reality is, our environment has gotten better. It’s developing countries like China that are contributing the most of the pollution today, because of the regulations that we have in place, because of the incentives that exist for companies to reduce their carbon footprint and to be more energy-efficient.
No, look at the US is a exporter of clean energy for the first time in a long time. That brings forth some geo-political and some environmental leverage that we have, I think, as we negotiate with, with countries like China, on trade issues.
Kathy: I’ve always found it interesting that we could export our pollution. We like to import goods from China, but we want them to keep their pollution over there when they have to create this stuff for us.
John: That’s a great point. Because of years and years of anti-business policies in this country, it’s also affecting our nation’s healthcare industry, so many of the drugs and medical supplies that our nation needs today to do testing and to resolve the coronavirus, a lot of these materials are coming from China. I think this also puts a spotlight on that as well.
Kathy: Well, they’re not coming from China anymore, right? [chuckles] We’re not getting what we need.
John: Right. We’re feeling that. When we talk about the supply chain slowdown, we’re feeling it on the healthcare front.
Kathy: Yes, this is what I really want people to hear because I’m on Facebook, and I see a lot of– I don’t want to say ignorance, that’s harsh, but uneducation, [chuckles] that lack of education on this topic that, maybe you’re healthy and maybe you’re strong and you can wander about. The big issue is that the supplies that are needed for those who aren’t maybe as healthy as others, we don’t have.
Importing Everything Is Not So Wise
When we’re walking about and potentially spreading the germ, that could affect the lives of others. This is really serious. There’s, I think, some much-needed medicines that don’t even have to do with coronavirus that we’re not getting now. People that rely on them daily, may not survive simply because they come from China. I don’t know if these are things that we can begin to manufacture here. I would hope so, so that maybe one of the big lessons we’ve learned here is that importing everything is maybe not so wise
John: Yes. We are seeing this dramatic and pronounced reshoring of manufacturing activity in the U.S., in the automotive sector and the aerospace sector and also in the pharmaceutical and healthcare sector, over the past several years. Much of that has to do with the corporate income tax cut to make our nation more competitive globally, the streamlining of regulations, and also the administration’s very aggressive policy on federal procurement; where if you want to do business in the several trillion dollar Federal Procurement market, you need to produce as many goods and services as possible here in the US versus in China or Mexico.
We’ve seen that. I mean, people talk about record job creation over the past few years. A lot of that has to do with a real renaissance in our nation’s manufacturing. The coronavirus, again, underscores another benefit to bring as much pharma and biotech and pharmaceutical manufacturing here to the US and out of China.
Kathy: Yes. All right. If you were a listener of the Real Wealth Show, John, let’s just say that you’re coming to us today to try to figure out what to do. You maybe have some money in the market, should people just get out now or just?
Protect Your Health and Your Assets
John: My advice is, with respect to the stock market, is obviously don’t panic and don’t do anything reactionary. It’s like looking in the mirror when you have the chickenpox. You’ll not like what you see, you’re going to scratch it, you’re going to make things worse. In terms of, is this the right time to buy that? That’s the big focus amongst so many Americans today. I don’t think you want to try and catch a falling knife either. That’s a very wise thing, so no one’s told me to. I don’t know exactly where the bottom is. I think our nation is a resilient nation that the fundamentals are very strong. The policies are pro-business to their pro-growth. We’ll get through this hopefully sooner rather than later.
The message is not to panic. Okay? Obviously take precautions on the health front. I think the degree to which you can avoid being in crowded areas, is probably a wise thing to do.
Kathy: Or around people who have been in crowded areas because they can carry it and not know it.
John: I mean, it is just so– You realize just all of the different industries that this is impacting, I mean, supply chain disruptions, Major League Baseball, Broadway shows. I actually went to the Yankee-Moreland spring training game in Roger Dean field and in Jupiter on Wednesday. That was the last spring training game of the year. I didn’t know that at the time. The little things you take for granted in terms of the calendar of your life, I mean, spring training baseball, Broadway show, all of these things today are not happening. I think we will come back hopefully sooner rather than later.
Kathy: Well, some would say a correction was needed. Unfortunately, it could have been anything to prick a bubble.
John: There’s been a leap. This is certainly a correction. Again, worst market crash we’ve seen since 1987.
Kathy: All right. If you were in contract on purchasing a rental property in a growth area, would you continue with? Again, if you were to invest in real estate right now, what would you do, if anything?
Real Estate Opportunities
John: I think there’s a number of very exciting opportunities in real estate. It really depends on the market and it depends on the project. Will I cancel a planned project that I did due diligence on, and that I believe in because of the coronavirus, because that factor alone? Probably not. I don’t expect many projects to be canceled based upon the coronavirus alone. What we expect, of course, is just the types of activities that lead up to a deal are slowing down. That will prevent deals from happening.
Agents are not going to be showing as many houses or people aren’t going to be willing to go out and to look at homes. We see that slowing down. We see the types of in terms of our development projects, there’s less corporate travel, there’s less field visits to inspect candidate locations for a project. Those activities will pick up once this virus seems to be not the threat that it is right now. Whether that’s a month or two months or three months, that remains to be seen.
Kathy: Fascinating. Yes. Okay. Well, it’s the sober truth, but it’s the truth and we need to really look at our portfolios. Are you concerned about cash in banks? Do you think there would be a run on the banks or a failure like we saw not so long ago?
John: No, I don’t foresee that happening. This is not any type of an indictment on it the strength of our institutions right now. That remains to be seen, and that’ll be a function of just how protracted the coronavirus scare truly is.
Kathy: It just seems like if everybody stayed home for two weeks, it will make a big dent. Two weeks at home, that would be a nice little relaxing time for people, get to plot those board games, maybe pull out that old guitar that needs to be dusted. [laughs]
John: Thank heavens, this is happening now and not a decade or so ago. Imagine dealing with a scenario without Netflix or Words with Friends or any of the types of the games you could play on your phone.
Kathy: Well, let me just be super clear.
John: We have ways to distract ourselves now.
Kathy: Yes, well, don’t watch Contagion like Richard I did last night. I don’t recommend going to sleep with that on your mind. [laughs] Anyway, it was very good, though, and very freaky. Oddly, very similar to a lot of what we’re experiencing except no foaming at the mouth. All right. Well, so good to have you here. Thank you for your insights. It’s sobering, but yet you have just to stay calm.
Just know that we’ve been here before and we will get through it. Over-leveraged companies and over-leveraged families may have a harder time but hopefully, most people listening have not done that and instead, have invested in cash flow properties in areas that tend to withstand this kind of recession. I mean, are there any markets that you would say will be less affected by a downturn?
John: We identify those three markets that I think are hypersensitive to this, again, tourism driven cities, international gateway cities like Las Vegas, Miami, New Orleans, Orlando. Energy driven markets, okay, Houston, Oklahoma City, Tulsa, and some of the secondary fracking markets, Pennsylvania, Southern Ohio, Indiana and Colorado. The financial service hubs, New York, Boston, Chicago, and the secondary banking hubs, Charlotte and Jacksonville.
In terms of more resilient markets, that’s really a more difficult question. I think that really is a project driven analysis that I would say, but I think one especially vulnerable sector, of course, is the Airbnb sector with our shared economy. Of course that’s being impacted by the decline in travel.
Kathy: Yes, and who wants to share their house with anyone right now? Good point.
John: I spoke at a redevelopment forum last week in New Jersey. A major topic was the rise of the shared economy. A lot of the advocates that are trying to stop and slow the shared economy, like Airbnb, are citing the rise of global health crisis as a reason for lawmakers to put more regulations in place. That’s something to keep an eye on… and becoming more cognizant of the local tenor among elected officials, and how they view things like Lyft and Uber and of course, Airbnb.
Kathy: Yes, that’s a very good point. I’m not getting anybody’s car anymore. Not right now. I’ll be driving my own car if I go anywhere. That’s something I wouldn’t have said six months ago, I would have said, “At some point, maybe we won’t be needing our own cars.” Although deep down inside I thought, “I could never live without a car.” But, yes, now I’m more inclined to just take myself.
All right, well, once again, John, so good to have you here on the Real Wealth Show. Thank you so much for your insights and stay safe and, I guess, wash your hands.
John: Thank you, Kathy. Yes, wash your hands and we will get through this hopefully sooner rather than later.