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What Would a K-Shaped Recovery Mean for the Real Estate Market?

Oct 26, 2020 by Deidre Woollard
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Ever since the COVID-19 pandemic hit, economists have talked about models for an economic recovery. The most optimistic forecast called for a V-shaped recovery with a fast rebound, while the U-shaped recovery called for a larger trough before a slow turn upward. Now, as the recession wears on, more economists are seeing a K-shaped economy emerge. This could change the way real estate investors need to think about the future.

What is a K-shaped recovery?

A K-shaped recovery is a bifurcated recovery, meaning that one part of the economy recovers quickly while other parts languish and decline. A big example of the upside can be seen in the stock market, which has recovered losses from earlier in the year. Meanwhile, unemployment remains high in many areas. Thousands of small businesses have closed, and many more are expected to fail in the coming months.

The positive side has included a booming residential real estate sales market, which is defying expectations in many cities. Redfin (NASDAQ: RDFN) reported that luxury sales spiked nearly 42% in the third quarter. Some workers who are remote are now choosing to have homes in resort communities, driving up sales in those areas.

In the jobs arena, certain sectors are recovering while segments like hospitality and retail are still struggling. Disney recently laid off thousands of workers and tourism-dependent areas like Las Vegas are particularly vulnerable. Different sectors of commercial real estate have been affected in a multitude of ways. Demand for industrial properties has soared while a whopping third of hospitality properties risk foreclosure.

"An important thing to note is that different areas of the real estate market are recovering differently and not at the same speed, so you're going to see retail and hospitality lag behind," says Ari Rastegar, Founder and CEO of Rastegar Property Company, a developer based in Austin, Texas. "You're going to see multifamily, namely Class B and Class C vintage multifamily, really recover. You're going to see the growth of median home prices in the suburban areas really spike and start to grow as people leave the urban core."

The downside of a K-shaped recovery is that it means that the recovery will not be evenly distributed. A K-shaped recovery could mean that many people won't be able to pay rent after the national eviction moratorium expires. With restaurants failing, many landlords will have to find new tenants for commercial leases.

Why inequality is bad in the long term

In the short term, the people and businesses benefiting from the top half of the K may pass on some of their wealth through spending, but in general, trickle-down economic growth is spotty at best, and perhaps even more so this year. People are not traveling much, and they are aware of the uncertainty in the world. While they may be doing well, they may not feel safe to spend. This is true both of individuals and of companies. Companies that have weathered past downturns may be more cautious and more likely to save.

The K-shaped recovery may be temporary. A second stimulus may help support businesses on the brink, and a reliable vaccine or treatment protocol will go a long way toward reassuring people. In the meantime, there may be opportunities for investors who are willing to bet that the types of properties that are not doing well now will recover.

"Regarding whether a K-shaped economy is positive or negative for real estate: It all depends on which ways you look at it," adds Rastegar. "The negative of buying hospitality or retail or things that have a longer correction timeline is that you're going to have to wait to get your money. It's going to be harder to finance those properties at the outset. But long-term, people will travel again, people will be in hotels again. But it's going to take some time to be able to do that."

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Deidre Woollard owns shares of Redfin. The Motley Fool owns shares of and recommends Redfin and recommends the following options: short November 2020 $35 puts on Redfin. The Motley Fool has a disclosure policy.