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I occasionally get emails from one of my readers.  This one provides a different perspective from most “Rants” I get.

As Bostonian, you make not like some of his political thoughts, but he makes some interesting points regarding the Boston real estate market and the overall economy.

Compare it to how you think.  

The next 7 weeks are key to everything. First, of course, in the run-up to the election. Some economists believe the jobs numbers will decline in September as the economy again slows. I believe they will rise. 

The Overall Economy

There is a real tension between the rise due to people returning to work as the $600 went away and as more things reopen.  On the other hand, there will be more small businesses and some large ones, like major retailers, which will shed more jobs as they close for good. I don’t think we can know which trend will be more impactful until we see August and September job numbers and GDP for Q3. My belief is things will get much better, and unemployment will decline

While the $600 and PPP was being paid out, savings went up dramatically to around 20%, consumers saved enough to have extra cash, and they made material pay downs of credit cards and other debt, so in general, consumers are in OK shape, but likely still reluctant to spend much right now.

 I believe there is general optimism with a lot of uncertainty right now

The Boston Service Industry

There is a real problem with hospitality, airlines, restaurants, oil workers, and soon government workers. Hotels will remain very challenged until 2023 or longer, most likely when travel returns full time as the vaccine takes full hold with enough people getting it. It may be 2024 or 2025 before parts of the industry fully recover. Even then, some big hotels will never reopen.

Boston Real Estate Industry

More and more Boston real estate closings are now done remotely. And more Boston condo renters will view properties via video and 3D. In addition, more will be comfortable renting a Beacon Hill apartment via Youtube.

The days when Beacon Hil renters had to pay a full month’s Boston real estate broker fee are over. The pendulum has swung in the opposite direction for al least the next two years.

More shopping will be done remotely

More shopping will be done remotely This means the very high rents charged for urban ground floor retail in office buildings is past its peak. A real problem for landlords. The other problem for office landlords and hotels is they need to have upgraded ventilation systems, and a lot more regular deep cleaning. That costs money. At the same time, many tenants will want lower rents and less space. No way to know how this tension resolves itself over the next year or two, but there is a real risk in urban office until it does. Most large office tenants are still paying rent, but it is unclear how much longer that continues as leases expire.

Retail has now changed permanently. It will be a while to see, but it may be that as much as 30% of retail is online. Target has now decided that for some low-value items it is cheaper to not have it returned if you do not like it for things that cost little. The US was vastly over-stored, with 50 sq. ft per person, compared to Canada which is one third that, and the EU which is single digits retail sq. ft. The elimination of a big piece of retail sq. footage was going to happen regardless, and the virus has simply accelerated it. Possibly one-third of retail will be permanently eliminated. Bad news for malls and power centers. It also means brands need to find new ways to market and deliver their products.

Walmart is now going to make a major challenge to Amazon, so that will simply accelerate online shopping even faster. Target and even Home Depot and Loews have done a very good job of integrating online with in-store, which is what will define the winners in retail.

This also means the very high rents charged for urban ground floor retail in office buildings is past its peak. A real problem for landlords. The other problem for office landlords and hotels is they need to have upgraded ventilation systems, and a lot more regular deep cleaning. That costs money. At the same time many tenants will want lower rents and less space. No way to know how this tension resolves itself over the next year or two, but there is real risk in urban office until it does. Most large office tenants are still paying rent, but it is unclear how much longer that continues as leases expire.

Now we can even buy a car virtually and get it delivered to your home. We no longer go to the supermarket. A once a week delivery of all our grocery needs comes to our door.

Boston Real Estate Office Towers

What we do not know is what are the social and real estate ramifications of all of this.  We are never going fully back to the way it was. Office socialization, training, and collaboration will change, but we do not know how yet.

As I have stated before, there will most likely be a mix of remote, in-office, and satellite office arrangements going forward in many businesses. Business travel will never fully recover as everyone has realized they can do much of what is needed by Zoom and other services like Zoom. It is unlikely to court hearings will ever go back to full time in person.

Boston Concerts and Museums

When will concerts and museum visits return to anywhere close to what was normal? It will take another full year, and the vaccine, before we even have a sense of how this all sorts out.

Boston Real Estate and Colleges

There is a new thing happening in colleges. Many small colleges are going out of business permanently.  Some will be redeveloped into residential communities or other uses, and some have no real estate value at all due to location. What is new is that some of the big universities with big endowments are starting to buy small bankrupt schools and using them to expand enrollment.  They eliminate the upper level of management completely and admit the next tier of applicants that were rejected first round. It becomes a remote campus.

This will change the whole academic world over the next few years. They will also be buying out some tenured professors who only really work part-time and then make their living as consultants. Well over 200 small schools will disappear over the next few years.

Some Good News for Real Estate

On the good news side, home construction and sales will be booming 2021, and that is a huge boost to the economy. This will continue for several years. Auto production has increased 200% or more since May and is back to 2/3 of where it was in February. Another huge boost. Both are beneficiaries of historic low rates.

Working From Home

A lot of workers find it is much more efficient to work from home and not commute.  Plus now they get to work out in the early morning or do whatever that they could not do before when they had to commute. They can start to work earlier, and have more time to think things through in a quiet place, with less stress of riding a train or bus or driving in the winter. Think how much more productive we all will be if there is less time wasted on travel and sitting around airports, or driving to meetings.

What is missing is the social interaction with colleagues, and training, and project collaboration were sitting in the same room does matter. Therefore there will be a mix of remote and in office. It will depend on what your role is.

The unemployment problem

The unemployment problem will be worst, and for people who can least afford it. Higher paid people to have savings, and likely have jobs that work well remotely, so can live normally for a long time even if their profession or business is very slow right now. It is estimated that 40% of all jobs can be done remotely, so those people will be fine. The other 60% need life to get back reopened. That 60% will not be running out to spend on discretionary items. It will be two to three years, at least, to once again attain the levels of GDP of 2019. Getting back to 3.5% unemployment will take years, if ever.

Manufacturing is coming back pretty well. It is a small business, restaurants, hotels, apparel stores, and tourism-related businesses that will die. That employs a lot of people. Just consider, if you work remotely from home you do not need to go to the dry cleaner and tailor so often. You are not going to out grab a sandwich for lunch. You don’t need so many suits or dresses. You are not riding the bus or train. Just a small example.

Income inequality

Income inequality will be worse between the asset rich, work remotely people, and the service wage earners. That has real political and tax ramifications. Some positives are inflation will remain very low, gas prices will remain very low, which helps low-income people, and interest rates will remain near zero for a few years, and that means good news for Boston condos for sale and for consumer borrowing and auto sales.

On the good news side, home construction and sales will be booming 2021, and that is a huge boost to the economy. This will continue for several years. Auto production has increased 200% or more since May and is back to 2/3 of where it was in February. Another huge boost. Both are beneficiaries of historic low rates.

Social unrest and crime wave in cities

One of the other big unknowns is how the social unrest and crime wave in cities get resolved. My assumption is, it has gotten so bad that there will be a wave of Giuliani like mayors and governors elected over the next two years, and the far left politicians will see themselves voted out in many places as normal citizens realize their lives are in danger again, and they can no longer go out at night safely. That potentially has real ramifications for retail and entertainment.

Boston Real Estate and the Bottom Line

Well, I threw a lot at you today. I’m curious what are your thoughts, especially regarding the future of the Boston real estate market?

Boston Real Estate Search

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