Following the economic chain🚶🏽‍♂️

People tend to think and talk about change in a binary way.

“I very frequently get the question: 'What's going to change in the next 10 years?' And that is a very interesting question; it's a very common one. I almost never get the question: 'What's not going to change in the next 10 years?' And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time”

Jeff Bezos

People tend to think and talk about change in a binary way. But as we know...life is rarely ever just black and white. Although the bulls and the bears seem to be the only ones that cut through the noise, fixating on the ends of the spectrum prevents us from realizing that change is often not in the outcome but in the medium itself (pun intended). 

To understand where our economy is headed, we need to follow the economic chain. Keep in mind most businesses operate on 5-15% net margins. The goal of this exercise is to understand economic projection thematically through cause and effects. 

Here are a few examples. For each premise, assume that it has a 20% impact. (ex. 20% replace their gym membership). The percentage is not as important as recognizing whether there will be an impact and the domino effects it will have. 

Gym (no chain)

Premise: People may replace their gym membership with at home workouts. 

Who’s Affected:

• Real estate

• Trainers

Impact: Minimal

Restaurants (medium chain)

Premise: Restaurants may permanently transfer to a take-out model (already happening because of rising labor costs). 

Who’s Affected:

• Real estate

• Many employees

• Food supply chain  

Impact: Medium. Labor intensive business with low margins. High-end restaurants that rely on dine-in experiences (alcohol, nice vibes, etc) will be put to the test. 

Office space (medium chain)

Premise: Companies will permanently move to remote work or at-least increase remote-work options.  

Who’s Affected:

• Commercial real estate

• Multi-family and residential real estate  

• Restaurants around the area 

• Transportation (public and private)  

Impact: High. While the labor proportion is not as high in white collar vs blue collar jobs, offices have large order effects. People in high-cost areas like the Bay Area may flee for a better lifestyle while still being able to uphold a strong career. Multifamily returns in the Bay Area were already trending towards 1-3% net cash flow banking on future appreciation. Many of these are owned by mom and pop investors that don’t have access to additional equity lines and pose a risk in the market having a major correction. 

Car manufacturers (large)

Premise: Although car manufacturers can operate in a contained environment, their sales and dealerships will suffer from reduced consumer spending. 

Who’s Affected:

• Industrial real-estate

• Real-estate for dealerships 

Impact: Low. These jobs are essential for the middle class. While car manufacturers have large labor workforces, they can still operate in a closed environment. Dealerships are at high-risk with rising obligations as cars sit on the lot. Meanwhile, we will see a large boom of manufacturing brought back into the United States as the world heads towards anti-globalization (more on this in another post). 

Entertainment & Venues (sports arenas, weddings, concerts, conferences, etc)

Premise: Socializing and business meetings will move more online.

Who’s Affected:

• Commercial real-estate

• Hotels and hospitality

• Transportation (airlines, taxis, etc)

Impact: Very high. Get-togethers (recreational or business) will suffer significantly. There will be a sudden surge as lockdowns lift but flatten and decline soon after. Many of these businesses have high fixed costs and will be financially tested to the brink. The hospitality industry is both expansive and encompassing and its demise will have a significant domino effect on other industries. 

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Here are some high-level takeaways from these examples: 

1. Mediums will change across all industries. 

2. Industries that can serve their customers in a flexible manner will thrive. 

3. Industries and companies with fixed costs and high amounts of debt will be tested. Many are already desperately trying to raise additional capital to pay off notes due in the next couple of years. One day the grim reaper will knock on the door.

4. Entrepreneurship through online offerings will surge across all industries from fitness to boutique online stores. 

5. Location matters - rather than flocking to big cities, the trend may revert back to favoring suburbia, inland, and even non-coastal states.

This crisis will challenge many businesses and industries in the short term but will also act as an accelerator for innovation. What will come next will be a rough time in modern day history. We are at the cusp of a social revolution where many countries will need to focus their efforts domestically. I am optimistic that we will overcome and evolve out of this. 

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