UCLA Anderson Forecast

• Revising a forecast published March 12, UCLA Anderson Forecast economists say the U.S. economy has entered a recession, ending the expansion that began in July 2009.
• The revised forecast is for the recession to continue through the end of September.
• The escalating effects of the coronavirus pandemic in March have reduced the first-quarter 2020 forecast of GDP growth to 0.4%. GDP for the second quarter of the year is now forecast to slow by 6.5%, and by 1.9% for the third quarter. With the assumption of an end to the pandemic and repaired supply chains by this summer, the Forecast predicts the resumption of normal activity in the fourth quarter of 2020 and a GDP growth rate of 4.0%.
• Full year 2020 GDP forecast to decline by 0.4%. In 2021, with the abatement of governmental pandemic expenditures and the continued contraction of residential and commercial construction, the economy is forecast to grow at 1.5%. Full recovery and return to trend expected in 2022.
• California economic downturn is forecast to be slightly more severe because of its larger proportion of economic activity in tourism and trans-Pacific transportation. Recession Expected to be more severe in California than for nation overall.
• Important caveat: If the pandemic is much worse than assumed, the forecast will be too optimistic. If the pandemic abates quickly because of the extraordinary measures being taken to address it, then the forecast will be too pessimistic and economic growth in the third and fourth quarters of the year will be higher.

Goldman Sacks Forecast

• Goldman Sachs expects -6% GDP growth Q1/2020, fueled by declining consumer spending - not structural weakness. This is better than the -8% GDP decline in 2008 and corresponds to 2.5% GDP growth expectation for 2020.
• Combined with the GDP forecast, economic and historical data suggest that this going to be a quick V shaped recover (maybe a U), per GS. This compares favorably with the historical average recovery time of 15 months for an event driven bear market.
• Goldman does NOT expect a softening in RE prices or a decline in the value of the dollar.
• This week banks put in floors from 3.5% to 4.0% on commercial property finance with 50 bps discounts for apartments.

My Recommendations

• Conduct a careful assessment of your risk profile and underwriting assumptions
• Factor in significant short-term risk increase in into deal terms.
• This as a potentially good opportunity to go after properties "once dust settles"
• Due diligence terms and periods should be carefully assessed as a result of issues brought about by the Corona-virus outbreak. Specifically, issues dealing with working with govt agencies for various approvals/signatures (development deals), dealing with third-party vendors/inspections and access issues for physical inspections.

Expect more reliable guidance in the next 2-3 weeks when testing results start coming in and we have a better idea what we’re dealing with. Markets face 2 types of uncertainty – known and unknown. As test results continue coming in, a large portion of the unknown will be eliminated, and the market will have a better idea of how to price the known uncertainty. We should have clarity (not solutions) by mid-April, if not sooner.