Coronavirus World – Adjusting to the New Reality
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Remember restaurants, theaters, going to the movies, book club, poker night, backyard cookouts with the neighbors – da Cubs, da Bears, da Bulls? Remember commuting to work? For that matter (for far too many of us), remember work?
As recently as the beginning of March, all of these concepts were unremarkable – just the things we did – whether daily, weekly, or just occasionally – without a thought or a care.
How the world has changed.
On March 20th, Governor Pritzker issued a “stay-at-home” order, the second such state-wide ban in the nation. This order followed the governor’s March 17th order closing all K-12 schools across the state.
The reality is – there is no safe-haven from this disease.
At the time these orders were made, Illinois had a couple of hundred confirmed cases of COVID-19 and just a very small handful of deaths from the disease. But the experts knew what was coming. As it turns out, many had known for some time.
Although the closure of schools and non-essential businesses seemed shocking when they were announced, the necessity of these restrictions soon became apparent as the infection spread and the death toll mounted.
In the weeks since these announcements were made, the New York region quickly became (and still remains) the epicenter of the COVID-19 emergency, not just in the United States but globally. As I write this article, New York and environs accounts for about one-third the COVID-19 cases in the country, and now has more cases and more deaths than China where the disease began. But Chicago has not been spared; it is also one of the areas of the country most impacted by the virus. The reality is – there is no safe-haven from this disease. The only protection is to take social distancing seriously.
Indeed, some predict that “recession” could be a best-case scenario.
How and when this will end, nobody knows. The best guess is that this will be a months’ long battle. In a worst-case scenario, this could last a year or longer. Meanwhile, the social and economic ramifications are mounting – and devastating.
As city after city and state after state followed the lead of New York, California and Illinois – closing businesses and ordering people to stay at home if at all possible – the once humming US economy experienced its fastest contraction in history. Jobless claims, which had never exceeded one million in any one week period, suddenly surged into the millions week after week. By late-April, unemployment claims across the nation in just the five weeks that began in late March total 26.5 million. At least 15% of the nation’s workforce is now unemployed, and the real figure could be closer to 20%. Such levels have not been reached since the Great Depression. This is all the more stunning, considering that unemployment stood at just 3.5% as recently as February.
Put simply, the financial catastrophe that has befallen tenants is a brewing financial catastrophe for property owners too.
As unemployment has surged, GDP has fallen with equally breath-taking speed. Some experts predict that the impending recession will be much worse than the Great Recession of 2008-2009. Indeed, some predict that “recession” could be a best-case scenario. The severe contraction of the economy since March is starting to look a lot more like the Depression of the 1930s than the recession that occurred a decade ago.
For many property owners, the impact of the new COVID-19 landscape on our businesses has been both quick and severe. Many renters (including in Rogers Park) are young with relatively modest incomes and little, if any, savings for a rainy day. Many work (or worked) in the service sector.
The COVID-19 crisis is unlike anything we have faced in living memory.
Huge numbers of people have been suddenly thrown out of work as bars, restaurants and businesses were shuttered to wait out the worst effects of the virus. Seemingly overnight, people who were in stable jobs are now desperately trying to figure out how to pay bills with no income and little to no savings. As property owners quickly realized, many of these same people are our tenants.
Put simply, the financial catastrophe that has befallen tenants is a brewing financial catastrophe for property owners as well. Tenant rents pay property owner mortgages, utilities, maintenance costs and property taxes. If rents fall sharply, property owners, especially the mom and pop operators, will also struggle to pay their operating expenses. This is a vicious cycle that has only started to spin. How far is goes and what the fall-out will be remains to be seen. The potential for a painful unraveling is clearly present and will likely ripple across the economy.
Larger firms are better positioned to weather this crisis, at least in the short-term. Many have reserves and access to capital, and are better positioned to withstand the sudden economic reversal. But, for small property owners, the collapse in rent collections is much more likely to result in a liquidity crisis. These property owners will struggle to pay their own lenders, vendors and employees.
In Chicago, many property owners report better collections in April than expected, but fear things will get worse as the crisis wears on. Meanwhile, the federal response has been, at the same time, substantial and ineffective. While Congress has enacted historic relief, totaling over $2 trillion for individuals, businesses and corporations, this relief does not seem to be getting to the people and businesses that need it most on a timely basis.
The COVID-19 crisis is unlike anything we have faced in living memory. The Spanish Flu of 1918-1919 was probably the nearest equivalent. But, as bad as Spanish Flu was, it did not have the same impact on an economy already devastated by World War One. COVID-19, by contrast, comes at a time when the US economy was riding high, and European and Asian economies were also strong. The worldwide impact of COVID-19 has had the same effect on other, major economies as it is having here, and all at the same time. There is simply no escape. No part of the globe is not experiencing the ramping up of COVID-19. No part of the globe is safe from what is, truly, a global pandemic.
Given the unprecedented nature of our current circumstances, it is difficult if not impossible to know what will happen next. Much will depend on how we balance the no-win options of shutting down the economy or letting the disease run wild across the globe.
Nobody wants a worldwide Depression with mass unemployment and widespread business failures. But the prospect of letting the disease run unchecked is worse. We have already seen what can happen when too many people get sick all at once. Just look at Milan, or Madrid or New York. The healthcare systems in all those places were quickly overwhelmed by the flood of patients that showed up at emergency rooms and filled up all the hospital beds to (literally) overflowing.
COVID-19 is not the flu. It is a game-changer.
In New York, this all happened when a relatively small percentage of the overall population was known to have contracted the virus. Now imagine what this might look like if 25% or 50% of the population contracted the disease over the same short period of time? Finally, imagine that this happens, not just in New York, but everywhere.
If you are not frightened by the prospect, you are not paying attention. It is the reason we are all being told to stay home and stay healthy. The alternative is unimaginably awful. At best, this will be a very challenging few months. At worst, the social and economic fall-out could be irreversible. COVID-19 is not the flu. It is a game-changer. What awaits us on the other side, we cannot yet know.
