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2020 Mid-Year Reflection

As we enter the second half of this unforgettable year, both positive and negative news abounds. Today’s announcement of positive results in trials of a potential vaccine from Pfizer offers hope. Will the “warp speed” process bring the vaccine to the public by year end or in early 2021? Meanwhile, virus infection spikes in highly populated bellwether states such as California, Texas, Arizona and Florida which is very troubling. Businesses that just opened are shutting down again and many workers are being “laid off again”.

The data: June economic reports released yesterday and today (Manufacturing & ADP employment) have been positive but they are trending up from the unprecedented drops from recent months. Tomorrow’s unemployment report is expected to also show positive trending. With the recent spikes and “re-shutdowns”, the trend we have seen for July, the specter of a “W” shaped recovery is looming. The upcoming corporate earnings from a quarter unlike anything we have ever seen in history should be fascinating, “A Tale of Two Cities”.

One of the biggest questions facing the commercial real estate industry is the future of office as an asset class, during and after the pandemic. Recent years have seen a boom in supply and demand as tech, media, and financial services have all embraced the collaborative nature of the office environment. Today, entire industries are working from home and meeting virtually. What’s the future? I noticed an interesting contrast last week as Barry Sternlicht issued a dire prediction for the massive NY office market. He noted that without a vaccine, workers are reluctant to ride trains and buses to the city, not to mention the densely packed sidewalks, lobbies, elevators, etc. He predicts a “tipping point” leading 25% drop in rental income, increased expenses due to new procedures, and a 40% drop in values. Meanwhile, here in Los Angeles, a Canadian developer announced plans to build two of the tallest office towers outside of downtown in the Miracle Mile district. The spec office development will total over 2 million square feet. The combination of hope, fear and uncertainty today brings to mind the opening words of the Dickens’ classic referenced above: “It was the best of times, it was the worst of times”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners