A back of the envelope analysis
By John Flavin
Consultants have proposed to prepare economic analyses for local cities for hundreds of thousands of dollars using sophisticated computer projections. My back of the envelope analysis is free and may be just as valuable.
When I first started working in real estate development, the industry was just developing fifteen year cash flow computer models to prove the value of a project. My boss at the time rejected this new-fangled voodoo and told me “if you can’t make sense of a deal on the back of an envelope, don’t do the deal”.
In that vein, here is my back of the envelope analysis of the primary components of the local economy under COVID-19:
- TOURISM: Use yourself as the test case: Are you interested in doing any sightseeing in the next year or so? Probably not, particularly if you are over 65. Several weeks ago I would have said younger people might take the risk but, with the recent spikes in areas that opened, I am now doubtful they will be so bold. In short, tourism will be restrained for the foreseeable future, probably even after a vaccine is made available now projected as the summer of next year but even then there are questions regarding the vaccine’s durability.
- HOTELS: Hotels are open and are assuring guests that the rooms comply with standards. However, some of the recent travel advisories I have read suggest you enter the hotel room dressed in something akin to a HAZMAT suit with a spray tank of disinfectant on your back. Not very comforting.
- RETAIL: Storefront retail was not a particularly healthy sector prior to the pandemic and even less so now as stuck at home people learned to or continued to shop online. Until storefront retailers adapt to the new reality, don’t expect to see much vitality here.
- OFFICE: Workers have recently been forced to work from home and many are finding the experience to be pleasant. Employers are witnessing increased productivity and may well be considering permanent shifts to work-at-home for a significant portion of their workforce. Such shifts will ultimately reduce the demand for office space. Those employees who do return to work will demand, as noted in a recent Wall Street Journal article, social distancing and frequent cleaning. Elevators themselves present problems as potential Petri dishes for the virus and low rise buildings in the suburbs may gain an advantage. Prior to COVID 19, employers could put four to five employees in one thousand square feet of space on an office floor. Now the same space will barely fit two employees. This change dramatically reduces the economic value of the property and the health of the sector.
- SENIOR LIVING FACILITIES: Once a darling of the investment world given the aging demographics, this sector hit two snags even prior to the pandemic: (1) seniors demonstrated a growing preference for staying in place and hiring aids; and (2) city planners found that such facilities do little to generate new enterprise in the community. The pandemic death statistics at senior living facilities has put even a larger question mark on the wisdom of placing a parent or other loved one in such a facility. Investors have cooled, at least for the near term, on this sector.
- INDUSTRIAL: Industrial is the one bright spot on the economic landscape. Healthy before the pandemic, industrial activity and demand for industrial space has been unchanged or increased. Having their international supply lines disrupted for either health or political reasons, companies are looking to locate light industrial work closer to home. Witness the manufacturers in Sausalito’s Marinship who recently retooled to make masks and hand sanitizer for health workers amidst the critical shortages of the recent past. The same innovation and flexibility are being applied to sea rise issues, energy brown-outs, equipment and battery cooling and other environmental challenges. Owners of these companies have even appeared before City Councils pleading for more space.
As I said at the beginning, my analysis is free. I tested my conclusions by walking through quiet spots normally full of tourists, checking out relatively empty hotel parking lots, surveying formerly successful retail areas with permanently closed shops, and seeing office buildings with large and obvious vacancies. The only active areas were the industrial ones and, if my analysis holds water, they will remain the only active ones for the foreseeable future even after a COVID 19 vaccine is made available.
Unlike many sophisticated and “magical” analyses, you can test my conclusions for yourself pretty easily.
I encourage you to do so.