Everyone can surely attest to the fact that the impact of the coronavirus pandemic on the global economy has been immense. Over the past few months, every sector including real estate has experienced unprecedented disruption. When the pandemic hit, for most economists trying to come up with a forecast, the focus was less on whether the economy would recover but more on the shape the inevitable recovery would take.
Some foresaw a V-shaped economic recovery, meaning that there would be a quick rebound after the recession. A less optimistic forecast called for a U-shaped economic recovery with a larger trough followed by a slow turn upward. However, as the COVID-19 crisis unfolded, what seemed to be more likely is a K-shaped recovery.
Learn about another type of recovery that some experts expected to happen: Forecast: A W-Shaped US Housing Market Recovery.
What Is a K-Shaped Economic Recovery?
A K-shaped recovery is one where there is an unequal recovery for different parts of the economy. Some segments of the economy experience quick growth while others continue to struggle and decline for a longer period. This is the economic recovery that we are currently experiencing in 2020.
For instance, post-coronavirus, parts of the economy like technology and non-discretionary consumer goods may do well. With a large part of the population spending more time indoors and depending on the internet, the coronavirus has really favored technology stocks. Other sectors like airlines, hospitality, and certain sectors of real estate may continue to struggle.
The stock market is experiencing robust growth. At the same time, many areas in the US are still experiencing high unemployment rates and the closure of businesses. This trend is expected to continue in the coming months.
Whether you will be on the brink of bankruptcy or have a booming business all depends on where you sit in the COVID-19 economy.
K-Shaped Recovery in the Real Estate Market
The K-shaped recovery has also been experienced in the real estate market. As the US real estate market began to feel the impact of the coronavirus pandemic, a housing market crash seemed likely. Commercial real estate was one of the hardest hit.
While there has been a growth in demand for residential and industrial properties, many office properties, retail properties, and short-term rentals have experienced high vacancy rates and risk of foreclosure. The possible impact of a K-shaped recovery on these properties could be immense and long-lasting. Many real estate investors may have to find new tenants for their properties. For instance, the coronavirus has inspired “work-from-home” programs and the trend could impact the vacancy rates of office units well into 2021.
One key characteristic of a K-shaped recovery is rising income inequality. While some sectors in the job market are recovering, others like retail and hospitality continue to languish. For instance, companies and areas that are dependent on tourism like Disney and Las Vegas have been hard hit. According to recent surveys, many workers have not been receiving salaries while others have had to accept huge pay cuts to remain employed.
Therefore, a K-shaped recovery could mean that there will be many people who will be unable to pay rent after the expiry of the national eviction moratorium. They are represented by the downward-slanting bar in the letter “K”. Meanwhile, the wealthy Americans with discretionary incomes and significant savings would still fare well as depicted by the upwardly standing bar of the letter “K”.
What Is the Long-Term Impact of a K-Shaped Recovery?
There are people and companies that are currently benefiting from the coronavirus crisis. However, a K-shaped recovery is bad in the long term. While some wealth may trickle down from those on the top half of the “K” through spending, this type of economic growth may not work well in such times of uncertainty. Even the individuals and companies that are doing well are cautious about their spending. If they have weathered downturns in the past, they are likely to focus on saving.
Investing in Real Estate in 2021
A second stimulus to support struggling businesses as well as a safe and effective coronavirus vaccine or treatment may make the K-shaped recovery temporary. In the meantime, real estate investors need to weigh their options carefully.
If you are thinking of purchasing retail properties in 2021, you may have to wait a little longer to begin generating good returns. Financing these properties is also going to be harder in the beginning because of the new risk they represent.
Although Airbnb rentals were hit hard initially, new data shows that the Airbnb market is in recovery. Just be sure to find out where Airbnbs are still generating income in the US during the pandemic and take precautions. In case there is another shutdown or travel ban in the area where you decide to buy an Airbnb property, have cash reserves to cushion the blow until you can open again.
Though many questions about the future of the real estate market remain, people still need a roof over their heads. Therefore, residential and multifamily investment properties may be a safer bet. Start searching for property in the best places to invest in real estate for 2021. To increase your chances of finding a profitable investment property, be sure to use Mashvisor’s real estate investment tools for your market and investment property analysis before making a purchase.
The Bottom Line
Ever since the onset of the coronavirus pandemic, economists have been debating about the possible models for an economic recovery. The main options that were considered had been a U-shaped recovery, a V-shaped recovery, and even a W-shaped recovery. However, these notions are long gone. With new reports pointing to a K-shaped recovery from the COVID-19 recession, it’s crucial that you do a lot of due diligence before investing in real estate in 2021.