Coronavirus sends economy into tailspin
“It was all good just a week ago.” – Jay-Z, “A Week Ago.”
Surely there’s a moment or two each day when you forget. Perhaps it’s for five seconds when you first wake up. For a beat or two, you mentally prepare yourself for your commute. Your mind runs through a Rolodex of pubs and breweries near the office you might stop in for a happy hour drink after the workday. You dread whatever grueling workout your trainer at the gym has dreamt up for you today.
Then you remember.
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You’re not leaving your house today to go to the office. You haven’t gone into work in two weeks — it just easily could be two years. Time compresses and stretches. The concept of “days of the week” seems an irrelevant vestige of a by-gone era.
In less than two months, the coronavirus has mutated from an obscure phenomenon in central China into one of the more destructive forces in recent human history. The disease, as of March 25, had infected at least 1,086 Coloradans and killed 20. The death toll worldwide was 21,174 and it climbs every hour.
COVID-19’s assault on the economy has also been relentless.
While economists had been monitoring the virus for several months, “I don’t think we foresaw it getting this bad where everyone is holed up in their houses, the restaurant industry is shut down, the ski industry is shut down and hotels are really scaling back,” said Brian Lewandowski, executive director of the Business Research Division at the University of Colorado’s Leeds School of Business. “To say that this is unprecedented understates it a little bit.”
Boulder Chamber CEO John Tayer succinctly summed up the feelings of many in the business community: “It’s insane.”
One reason the crisis has felt so devastating is due to the stark contrast between the current reality and the last decade-plus of strong economic performance.
“As recently as about two weeks ago, you could say we were enjoying an exceptional period of economic vitality. Our biggest challenges were addressing the needs of the workforce such as improving transportation corridors,” Tayer said.
Road improvements aren’t a major priority when no one is leaving their home to drive to work.
“Those are challenges of a very robust economy,” he said. “Very quickly, we’ve had to switch to the other side of the coin: how do we sustain businesses in a very difficult economic period?”
The Dow Jones Industrial Average closed at a record high 29,551.42 just weeks ago. On March 25, it closed at 21,200.55.
“We went into the year thinking GDP growth in the U.S. might be positive, up 1.5 percent or something in that range,” said Rich Wobbekind, CU’s Business Research Division executive director and the senior economist. “Now it’s going to be very difficult for GDP growth to be positive for the year at all.”
Local economists don’t expect the region to be able to right the ship anytime in the very near future.
“Certainly the second quarter is going to be pretty dismal,” Wobbekind said.
“The original thought was that this would likely be a very much V-shaped kind of recovery,” which is marked by a fairly brief period of decline followed very quickly by steady growth, he said. But experts now believe “it’s going to take too much time for these industries to gain serious traction again” to avoid a U-shaped or a hockey stick-shaped recovery, both of which are longer and more painful.
Still, a comeback will happen someday, business leaders say. All is not lost.
“We are entering what could be the most creative period America will have this century,” said Jana Sanchez, executive director of Fort Collins-based nonprofit business innovation facilitator LaunchNo.CO.
“The world is upside down and we’ll have to start thinking about things differently in terms of our values and our goals,” she said. “These types of situations tend to lead to a lot of creativity, innovation and entrepreneurship. People are sitting around at home thinking, ‘Well, now would be the time for me to flesh out this idea for a business I’ve always had.”
Whenever the world gets back to normal, it will be a new normal.
“There will be forced evolution for every industry,” The Group Inc. president Brandon Wells said. “We’re going to come out of this but business will be forever changed.”
The COVID-19 crisis, by shutting down offices and prohibiting people from being in close proximity, is expected to change the very nature of how many Americans work. When this is all over, why would I go back to commuting into the office everyday when I’m just as productive working from home, folks are asking themselves.
“I think we can certainly envision a world where people find that now that they’re forced to work from home, they actually adapt to that change and are able to work from home better” than in a traditional office setting, Lewandowski said. “Maybe in the long run we will see more willingness to work remotely and less of a need for everyone to be going into the office or scheduling in-person meetings.”
Wobbekind echoed his sentiment and remarked on how quickly American workers have adopted new remote-working technology such as Zoom.
“In just two weeks, we’ve all become a lot more savvy about how to do all of these things,” he said.
This new work-from-home era could be an inflection point for workers with disabilities, who have long been marginalized in traditional office settings.
“This community has been screaming for years that it’s not that hard for companies to make the accommodations they need. Now all of a sudden, we’re all working from home and companies don’t always have to do in-person meetings. Companies are realizing that they can do things differently and should be looking for workers who can excel at doing things differently and working from home,” Sanchez said. “That gives me some hope.”
The COVID-19 outbreak is a “dramatic example of a situation that leads to transformation,” Tayer said. “We are a community that has the adaptability and innovation to move beyond this difficult challenge. But I hope we always remember that what we enjoyed just two weeks ago is not something you can always expect.”
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Banking
The Great Recession in 2008 saw the downfall of countless financial services firms and banks, from Lehman Brothers to Washington Mutual. The current crisis could be a bit kinder to bankers.
“For the last few years, we’ve been spending a considerable amount of our resources on technology, and it’s clearly paying off in moments like this,” Elevations Credit Union CEO Gerry Agnes said. “… In times of crisis, people tend to focus on their basic needs. That’s things like food, shelter, power, water and money.”
While the full impact of the COVID-19 outbreak cannot currently be calculated, banks “have reached out to our borrowers to ask them for the impact the virus is having on them,” AMG National Trust Bank commercial banking president Thomas Chesney said.
“For those borrowers owning retail centers, some have tenants in the essential services space that are unaffected while others have tenants that have had to close. In those cases, the borrowers are reacting on a case by case basis, and AMG stands ready to help, too, also depending on the specific issues the borrower is experiencing,” he said. “For the borrowers in the multi-family space, AMG hasn’t yet seen deterioration, but that may surface in April and May when those monthly rents are due. AMG has a number of wealth management clients whose portfolios have been impacted by the sudden decline in the stock market.”
Banks are seeing increased drive-up banking activity, including larger cash withdrawals.
Customers are relying more heavily than ever on mobile banking applications, but Agnes sees a role for branches in the future.
“How members use those branches will be different,” he said. “I think you’ll see far less transactional activity … but people still want human interaction” with financial advisory and business lending services.
Cannabis
In the short term, the coronavirus outbreak has been a boon for Colorado’s pot businesses.
Demand has been sky-high and a short-lived prohibition in Denver sent customers flooding into dispensaries and ensured pot shops would be classified as essential businesses in future stay-at-home orders.
Sales last March 20 were up 28 percent over the previous Friday, according to data from Boulder-based BDS Analytics.
Some dispensaries reported that last weekend was “busier than 4/20,” the unofficial marijuana holiday held on April 20, BDS vice president and chief analyst Greg Shoenfeld said.
While demand is up, prices have remained fairly stable.
Bethany Gomez, a managing director with cannabis-industry analytics firm Brightfield Group, said she doesn’t expect to see prices spike unless there is a disruption in the supply chain. However, the marijuana industry, by nature of being highly regulated by state governments where it is legal, is insulated from those disruptions.
“Cannabis is largely a self-contained industry,” she said. “By law, things have to be cultivated, processed, extracted and sold all within the same state.”
The coronavirus outbreak is expected to help facilitate a shift in consumer behavior.
In Colorado, cannabis transactions have historically occurred in person; consumers go to a dispensary, wait in a lobby, then a budtender personally sells the product and rings up the customer.
In the era of social distancing, this model is less feasible. In fact, the shift to online ordering and delivery services — already popular in other recreational-cannabis states such as California — began before the coronavirus outbreak.
Oil and gas
The COVID-19 outbreak is merely one of the significant headwinds facing Colorado’s energy sector.
The industry has been “impacted by much slower global growth” and “coronavirus is only exacerbating the problem,” said Brian Lewandowski, executive director of the Business Research Division at the University of Colorado’s Leeds School of Business.
The average closing price for a barrel of oil in 2019 was $57.05. On March 25, a barrel of WTI crude was selling for less than $25.
Saudi Arabia and Russia, the second and third-largest oil-producing states in the world behind the U.S., have feuded over production increases, exacerbating the price drop.
Additionally, new regulations on Colorado’s oil and gas producers went into effect this year.
“It’s a trifecta of downward pressures for the oil and gas sector in Colorado,” Lewandowski said.
A total of 64 percent of the current year’s property tax base in Weld County comes from oil and gas production, so price and output declines are especially painful in parts of Weld County.
Even if the coronavirus were eradicated tomorrow, the energy industry’s problems wouldn’t disappear.
“It’s hard to predict a quick comeback when people aren’t using as much fuel and we have countries refusing to have output limits put in place,” Lewandowski said.
Real estate
The residential real estate market has slowed a bit since the COVID-19 outbreak, but certainly hasn’t ground to a complete halt.
“The biggest concern that we had was whether properties would withdraw” or be pulled off the market by the seller, The Group Inc. president Brandon Wells said.
From March 16 through March 22, withdrawn properties did tick up 111 percent over the prior week, he said, citing data from Information and Real Estate Services LLC, a Loveland-based multiple listing service that operates in Northern Colorado and the Boulder Valley.
However properties under contract were down only 13 percent and properties sold were down 5 percent.
The result is a reduction in inventory in a market where inventory is already very low.
“We’re still seeing multiple offer situations on properties just because there are far less of them to choose from,” Wells said.
While this current economic downturn may ultimately be as severe as the Great Recession in 2008, it’s important to note that the two events had very different causes.
“Real estate is not at the forefront” of dragging the economy into recession this time around, Wells said. “If you go back to 2008, so much of that was caused by bad lending practices and subprime loans where we were selling the American Dream to people who didn’t have the mechanisms necessary to fund it.”
During the current crisis, residential real estate provides “tappable equity” that can help those “who have lost jobs and lost wages weather the storm,” he said.
The industry “will see reduced sales” in the coming months but Wells is not convinced owners will see major reductions in their home values, in large part because the inventory is so tight and new construction is expected to slow significantly.
“We’ve been 5 million homes short in the United States over the last decade,” he said. “This event will cause us to have an even shorter amount of inventory. It’s basic economics of supply and demand.”
On the commercial real estate side, deals are still being done.
“We’re kind of surprised that things haven’t completely ground to a halt,” said Geoffrey Keys, president Keys Commercial Real Estate LLC. “We’re still writing leases, writing contracts and doing some deals.”
However the deals being completed now were mostly initiated prior to the current crisis, he said. “I don’t know if there is a new generation of deals right now.”
The retail real estate market “is going to get hit pretty hard” but the industrial and office market “should be able to weather it pretty well,” Keys said.
Office users are less susceptible to current forces — the forced closure of restaurants and bars and social distancing policies that limit the number of people in stores — than retail users.
For opportunistic investors, the COVID-19 crisis could prove profitable.
“If I was an investor, I’d be looking at retail pretty hard right now,” Keys said. “If you’re a motivated buyer, transactions are going to be cheaper just due to the fact that interest rates are low.”
Service, hospitality and tourism
Few industries in Colorado have been hit harder than the service, hospitality and tourism industries, which have been forced to close up shop or completely shift business models.
The sector, which employed more than 327,000 workers in the four Northern Colorado and Boulder Valley counties, has seen some of the sharpest unemployment spikes as restaurants and bars have been shuttered, hotels have emptied out and events have been cancelled.
“We’ve had almost every client [with events scheduled over the next couple of weeks] cancel on us, and we’ve lost almost all revenue and hours for our employees,” said David Rubin, owner of Boulder-based catering and events services firm A Spice of Life Inc.
It’s not just smaller local firms that are feeling the squeeze. Broomfield-based Vail Resorts Inc. (NYSE: MTN), which operates ski areas such as Vail, Beaver Creek and Breckenridge, estimated in March that the shutdown of its North American resorts could cost the firm as much as $200 million in lost revenue.
When the COVID-19 crisis calms down, “there will be some pent up demand, especially with all the stimulus money that will be out there,” said Richard Wobbekind, executive director of the Business Research Division at the University of Colorado’s Leeds School of Business.
This is good news for firms that sell durable goods, but less so for the hospitality and tourism industries.
“It’s not like you can resell the hotel room that sat empty last night,” Lewandowski with the Business Research Division said. “You can’t resell a lift ticket for a skier who doesn’t show up. That’s why the tourism industry is so different from some of these manufacturing sectors.”
During times of crisis, regulators and government officials must be nimble and allow businesses to find new ways to survive.
“Nuances in regulation need to change to immediately give businesses the opportunity to move forward,” Boulder CEO John Tayer said. For example, restaurants must be allowed to deliver alcohol, a major revenue source for many establishments.
“The major consideration is keeping cash in the pockets of these businesses so they can operate,” Tayer said. Governments should consider fee waivers and tax abatement programs as potential ways to free up some cash for service businesses.
Technology, startups and innovation
Technology firms are uniquely positioned to weather the early COVID-19 storm.
“Most [technology startups] are doing fairly well in terms of being able to continue working,” said Jana Sanchez, executive director of Fort Collins-based nonprofit startup innovation facilitator LaunchNo.CO. “Programmers and software folks are typically able to work from home pretty easily. They’ve got the tools and technology at home already.”
The big concern, she said, “is whether or not large enterprise clients will cancel orders or downsize contracts over the next couple of months.”
Sanchez urged startups to “make sure you know inside and out what the legal clauses in your contracts are that would allow a customer to get out of it.”
It’s “entirely likely in the next few months” that startups will see clients start to use every trick in their attorneys’ arsenal to break contracts.
Access to venture capital is critical for startups.
“Each investor has their own viewpoint on the world but I don’t expect capital to completely dry up,” Matchstick Ventures partner Natty Zola said. “In general, I expect fundraises to take longer and have lower valuations.”
He added: “Companies should be prepared to answer questions around how they’ll extend the runway, how they’ll handle the new economic environment and show how they can do more with less.”
The crisis has been inconvenient, but by no means devastating for technology accelerator programs.
“The program is continuing and in good shape,” said Zola, who also serves as Techstars Boulder’s managing director. “We shifted the program to be fully remote two weeks ago. The companies responded really positively and have been incredibly helpful in adjusting the program. Techstars has run virtual programs for years so we have a playbook and experience with this change.”
