Experts Make A Case For Optimism, But Restaurants Face A Tough Slog

The case for a V-shaped recovery from the pandemic-induced U.S. recession rests on how well recovery goes and existing pent-up demand, an expert said this week.

CBRE Chairman of Americas Research Spencer Levy made the remarks Thursday when he keynoted the ULI Northwest Arkansas: Overcoming COVID-Restaurants & Real Estate webinar.

"Our shop believes we're going to be in for a rapid recovery, starting in the third quarter and accelerating into next year," Levy said. "A lot people disagree with that. A lot of people are in W camps and U camps and L camps, sometimes I think it's like 'Sesame Street,' coming up with every letter of the alphabet to describe it.

"Even though we're in the optimist camp, we still believe GDP is going to fall about 5% for 2020, and go up by about 6% in 2021," Levy said. "We're looking at facts on the ground in China right now, and facts on the ground throughout Asia, and they're bouncing back a lot faster than people understand."

Office property tours conducted by a colleague in China are now at 85% of peak and foot traffic is higher in half the cities than it was a year ago, he said. There, every shopping center is open, and industrial capacity is increasing. 

Conditions aren't all good in China, since there isn't a lot of travel yet, Levy said, but the economy is definitely bouncing back as the country deploys testing, tracking and technology. If those can be deployed here, the U.S. will bounce back as well. 

"We believe it will be a tough sled for the next quarter, but that we'll bounce back over the next two years. For real estate, we believe in the one, two, three scenario," Levy said.

That is, industrial and multifamily will come back first. Next will be office, and finally retail and hotels, though staycation hotels will be back sooner because of pent-up demand.

"The next 90 days are the most important 90 days in the history of our industry," Levy said. "All the people we do business with are lacking the same basic thing: price discovery. They don't know what the value of assets are, and they don't know what rents are."

Until there is price discovery, he said, there will be material fall-off in leasing and capital market activity, Levy said. When the markets hit bottom, that will lead to price discovery, something that might well happen in the next 90 days. 

"The good news in some areas, we've already hit bottom and are getting better," he said. "That would be in debt area, and since then the cost of debt has gotten better, and this is largely through government support."

However, most parts of commercial real estate probably won't hit bottom until June, Levy said, adding that he hopes rent collections will be better in July than June, or at least no worse.

"At that point, the capital markets will have confidence to transact more, and people will have more confidence to deal with what is market rent," he said. 

"Pricing power will drive the economy forward faster than you think, combined with pent-up demand and some marginal improvement with the disease, we will bounce back faster," he said. "That's why I'm in the optimist camp."

During the webinar's panel discussion, experts focused on the hardships of the restaurant industry, both from the perspective of operators and landlords. The consensus: the challenge is unprecedented, with the industry just struggling to survive right now. But eventually, it will rebuild and thrive.

"Right now, we're very much in the survival stage, and the major takeaway is that restaurants need government relief, and they need it immediately," James Beard Foundation Impact Programs Associate Emily Rothkrug said. "They aren't getting it enough through PPP or other programs."

She pointed out that the industry contributed $889B in sales to the U.S. economy last year.

"With a staggering number like that, industries like cruises and airlines, which contributed less to the U.S. economy than restaurants, they're all getting their own bailouts," she said.

"We operate a lot of different types of food service facilities, so our experiences have been really different," Pig and Swing Restaurant Group Executive General Manager David Milligan said.

One of its operations is a brick-and-mortar, casual seating restaurant with no opportunity for patio seating, and it is operating at about 10% of sales. The company's ice cream shop, by contrast, has been doing well with a donation model, as a way to reach out to the community. Customers pay what they want.

The company even opened a restaurant only two weeks ago. "It's exceeding all expectations, because it has a huge patio and no servers," Milligan said. "We've seen all ends of the spectrum."

"We're fortunate that we have drive-thru windows," 3Pointe Restaurant Group President Jamie Rheem said, explaining that before the crisis, drive-thrus were essentially add-ons to the main dine-in business, but they have evolved to be much more.

"[Our drive-thrus] became very efficient and it changed the ballgame, with sales through windows building up, because the demand is there," Rheem said.

"We consider ourselves partners with our tenants, particularly our small-business tenants, and we've had a mixed bag of [those] that are successful or not," said Tom Allen, executive vice president and principal at Cushman & Wakefield | Sage Partners. 

"Some are doing well with drive-thrus, such as Chick-fil-A, which is one of our tenants, but there are restaurants that are really suffering," he said, adding that some restaurants are choosing not to reopen, because 25% occupancy isn't enough.

"We're looking at the expanded patio situation," Pivot Project Managing Partner Ben Sellers said. "We've got a few tenants setting up picnic tables on sidewalks and parking lots to expand their seating options."

Tenants are also operating with an abundance of caution, he said. Even though they can open dining rooms at 25% capacity, many of them haven't done that, as they try to understand the data and the health risks. 

"Everyone wants to make sure they don't open too soon and cause that risk," Sellers said.