How The Market’s Historically Handled Crises

During a health and financial crisis, it’s difficult to wrangle panic and objectively assess the best path forward. A healthy assessment becomes even more difficult given the scope and swiftness of the coronavirus. The spread of COVID-19 inspires fear and uncertainty, and the necessary lockdown response has placed a cap on the most prolonged period of economic expansion in US history. 

To mitigate a fight-or-flight response to the unknown of coronavirus, it’s helpful to look back on where we’ve been. The US and global economies have managed crises before, and these history lessons provide us valuable insight into how the commercial real estate industry might approach the potential short and long term ramifications of coronavirus.

In this piece, we’ll examine financial and natural disasters on a case-by-case basis to identify what worked, what didn’t, and what is most applicable to the coronavirus situation.

The Great Recession

The most recent shock to our economic system arrived in the form of the Great Recession of the late 2000s. 

Per the International Monetary Fund, this period was the most severe economic and financial disaster since the Great Depression in the 1930s. The combination of the burst housing bubble, the collapse in subprime mortgages, and other financial vulnerabilities led to a 19-month economic downturn felt most strongly in North America and Europe.

The recession lasted less than two years but had a lasting impact reaching into the early 2010s. The slow recovery affected commercial real estate, albeit to a far lesser extent than its housing market counterpart. Vacancy rates rose, defaults rose, and insurance claims and liability suits multiplied like rabbits. Desperate times called for desperate measures.

Investors and organizations who survived the worst of the recession followed shared behavioral patterns:

Risk Management Reigns

As developers defaulted, employees lost work, and shareholders struggled to recuperate losses, lawsuits skyrocketed in the wake of the financial crisis. A white paper by Zurich reported there were 71 securities cases in the commercial real estate sector between 2007-2010, on top of massive defaults and foreclosures. People were going after every cent they could, and many in CRE saw it as a wake-up call to minimize operational risk.

Diversification = Stability

Investors with a more diverse portfolio across both asset types and different markets had the upper hand in the Great Recession. Texas cities served as a resilient example at the time: in 2010, they experienced an economic boom as a result of them choosing to invest in multiple types of CRE, rather than other states such as California and New York, where real estate was struck more severely. 

Diversity is a foundational tenant of CRE — not to mention investing in general — and those who spread out the risk will have a wider shield against the ramifications of a financial downturn.

Strategy is all important

Commercial real estate markets significantly differ per region, metro, and city, and asset classes. As such, different markets are equipped in varying ways to handle a financial crisis. In the Great Recession, we observed varying impacts not only among different markets but also in different asset classes. Some, in fact, performed better during the recession, such as self-storage units.

Smart investors during this time carefully observed on a per market and asset class basis how they’re investments might respond. Those who tracked the changes were able to strategically map out tailored game plans to minimize their exposure and maximize recovery periods.

Patience is a virtue

It took nearly three years to survive the worst of the recession, but smart investors found hearty buying opportunities in the shake-up. 

We may see a similar recovery trajectory following the coronavirus, two-three years to get through it, but it may provide some of the best buying opportunities in recent decades.

The coronavirus as a natural disaster

Many publications and economic experts compare the impact of novel coronavirus to that of a natural disaster, rather than an economic-driven crisis. The very human cost of the coronavirus reflects those of the deadliest hurricanes and earthquakes, which snuffed out both lives and livelihoods in a single swoop.

Famed internet trend analyst Mary Meeker and her team at Bond Capital compare the speed of coronavirus’ effects to that of the 1906 San Francisco earthquake, which decimated the city at over 136 miles per second. In a matter of months, the coronavirus has rapidly spread to 3 million positive cases and over 200,000 deaths, with 93% of the world’s countries reporting infections (as of 4/27/2020). 

Less metaphorically, Former Fed Chairmen Ben Bernanke compared the coronavirus to a natural disaster. A student of the Great Depression, Bernanke says that while he expects a “very sharp” US recession, the economy is likely to recover quickly once the medical aspect of the virus gets under control.

Hurricane Katrina’s Wrath

The Atlantic hurricane season of 2005, led by the devastation of Katrina, cost $209.2 billion in financial losses as measured by insured versus non-insured losses. Over one million people left Louisiana in the aftermath of destroyed homes and businesses. 

As relief efforts struggled to mitigate the damage, the state observed recorded levels of unemployment benefits claims, hitting a peak of 73,702 in September 2005. Interestingly, this number is far above claims processed in September of 2008, the peak amount during the Great Recession. 

The Global Scale of Natural Disasters

As the world becomes more and more globally connected, more businesses risk potential disruptions due to natural disasters. 

For example, the devastating 2011 Tohoku earthquake and tsunami in Japan cost $221.6 billion in damages, with nearly $185 billion uninsured dollars lost in the disaster’s wake. The cost of fatalities, injuries, displaced employees, and lost funds shuttered business across Japan for months. Not only that, but the loss of factory-made supplies from the country also resulted in the shuttering of other countries’ businesses, such as auto-manufacturing plants in China, Europe, and the US.

The coronavirus could undoubtedly be considered a natural disaster of a global scale — yet the virus has spurred global activity to solve the problem at a similarly unprecedented level. Too, we’re experiencing the crisis today, instead of ten years ago, when we were far less connected as a global community. Per Mary Meeker’s team, we’ll soon know whether the rapidity of the disease can be countered by the fast-acting measures and passion of experts worldwide, all committed to combating the virus. 

Takeaways from historical crises

Here we must address a crucial difference: the coronavirus is a pandemic — and not a financial — crisis. The economic shock is the direct result of measures required to contain the spread of the virus, including isolation and social distancing. Federal Reserve Chairman Jerome Powell told NBC, “I would point to the difference between this and a normal recession: There is nothing fundamentally wrong with our economy.”

The US commercial real estate sector seems to recover quickly from both natural and human-made crises, typically in two to three years. Whether the global scale of COVID-19 will trigger greater financial loss or faster recovery remains to be seen. However, it would behoove government leaders to prioritize economic stability, including that of the CRE industry, as researchers race towards a vaccine. 

The federal government, several states, and other countries have implemented such measures, including the immense CARES Act’s $2 billion in stimulus funds. These regulations are far more targeted than that of ARRA and other previous stimulus packages, striving to carry the economy across the threshold between lockdown and a healthcare solution. 

And amid the upheaval, there’s hope: the catastrophe often jumpstarts conversations about infrastructure improvements and ways to mitigate future risks. It’s a waiting game, but there are actions the commercial real estate industry can take to position itself to emerge intact — if changed — on the other side.