June 1, 2020
GREATER FORT LAUDERDALE CHAMBER OF COMMERCE’S COUNCIL OF ECONOMIC ADVISORS BACK ‘RE-OPENING’ IN WHAT WILL BE A LONG ROAD BACK TO RECOVERY
“Hope springs eternal.” Perhaps that is the appropriate mantra and best description for a business community rocked by a worldwide pandemic that has driven our economy to depths not seen since The Great Depression.
In the past three months, deaths from the novel coronavirus exploded, exceeding 100,000 nationwide and 2,500 in the state of Florida. The pandemic’s impact on the economy was quick and brutal – businesses shuttered, jobs lost and the workplace forever changed. As the nation begins to re-open in an attempt to re-start its economy, the business community in South Florida and across the country face a new reality filled with both promise and pitfalls. As one participant in the Greater Fort Lauderdale Chamber of Commerce’s Council of Economic Advisors put it: “If you’re not the leader in an industry, now is the new opportunity to become one. If you’re a leader, you’re going to have to work extra hard not to let others catch up. There’s really no coasting now.”
Council members are already seeing changes in this new business environment. In its new second quarter survey, 70 percent of Council respondents have seen either “severe” or “significant” negative disruptions to sales activity due to the virus. A majority of the respondents – 51 percent – don’t expect to see pre-COVID sales activity before June 2021. Seventeen percent of the respondents think “normal” sales won’t return until after 2021.
Tightening credit conditions is also a new reality. A whopping 62 percent of survey respondents are experiencing either tightening credit terms or have seen a decrease in available credit and capital. Those changes in credit conditions and receivables are definitely impacting supply chains, according to 73 percent of survey respondents.
Respondents are split on how fast businesses might return to adequate staffing levels, a key indicator of economic health. More than half, 56 percent, believe their firms will reach adequate staffing levels before the end of 2020. The rest think the return will take place in either 2021 or beyond. More important though is the definition of “adequate.” A resounding 83 percent believe the new “adequate” will be different than in pre-COVID days.
Half of the Council respondents believe the growth of their business will be lower or much lower over the next three to six months when compared to current rates, but the group is much more optimistic in the long run. When asked about the outlook for growth over the next two to three years, 78 percent saw “higher” or “much higher” growth. Said one Council member summing up the business environment in construction: “I feel like we’re in a Bizarro World where I feel way more certain of where I’ll be in 24 to 36 months than the next six months.”
The Council of Economic Advisors consists of 23 CEOs, C-suite executives and senior management of companies that represent South Florida’s key industries. Council members are chosen for their expertise, experience and insights into business development, expansion strategies, operational costs and potential job growth, which are used to evaluate regional economic forecasts. The Council’s input continues to be extremely beneficial as this select group of advisors has accurately forecast South Florida’s economy for the past ten years.
The 2nd Quarter Meeting of the Council of Economic Advisors took place digitally on Wednesday, May 20, 2020. The participants included Chamber Chair Bill Feinberg, Chamber President and CEO Dan Lindblade, CEA Chair Richard Clark and Karen Gilmore, vice president and regional executive at the Miami Branch of the Federal Reserve Bank of Atlanta. What follows is the quarterly outlooks for key regional business sectors.
Between the stimulus checks to the Paycheck Protection Program, the federal government’s response to the novel coronavirus has been good for this part of finance sector. Work has been steady, extending long past the traditional April 15th tax deadline. The outlook for the rest of the year, according to one Council member familiar with the industry, is less clear. Commercial, industrial and technology accounts seem to be okay, some residential are taking hits, while retail and hospitality have been decimated, he said. Another concern that will play out in the long term is the design of collaborative office spaces amid a pandemic that has forced more employees to work from home. “If you want to bring them back to collaborate, well, I’m not going to walk over to your desk and look over your shoulder to look at a monitor,” the Council member said. “I’d rather do that from my home.”
Banks, both commercial and community, have been busy, particularly with administering the Paycheck Protection Program, the federal loan program and lifeline to many business owners. According to federal Small Business Administration data, there have been 325,000 PPP loans issued in Florida amounting to $30.3 billion. The loan program has boosted bank balance sheets, but as one Council member bluntly described it: “It’s been a lot of work for the financial reward we’re going to get.” The staggered economy and flat interest rates are still problematic. One banker on the Council reported that a third of the bank’s loan portfolio has requested three-month payment deferments, and financial institutions are already getting warnings from bank regulators to tighten lending procedures, a move that will make it harder for businesses to obtain credit. “It’s unfortunate that we have to do that,” one Council member said. “But, the regulators will be penalizing the bank if we don’t. So, we will continue to lend, but you’re going to need to be strong for us to lend to you.”
In the short term, this sector appears to be fairly robust. Ongoing construction and real estate projects continue, but the question remains what occurs in the near future with those planned projects that have yet to start. “I feel like we’re in a Bizarro World where I feel way more certain of where I’ll be in 24 to 36 months than in the next six months,” one Council member told the group. Changes in the marketplace, along with growing uncertainty in real estate development brought on by changing lending practices by bankers and private equity firms haven’t helped. “People are calling but the demand is different,” said another Council member. “The demand for condominiums is for redesigning building smaller. We’re redesigning some condos as rentals.” The good news is the Fort Lauderdale area continues to be a magnet for development, particularly from New York and Miami. Another positive is residential remodeling, which continues to rebound after an earlier slump due to the virus. Although our numbers are nothing like they were, I feel like in six months, if things continue, we should be back to normal early next year,” a Council member familiar with the business said.
Much of the money-making business at hospitals came to a halt as administrators put elective procedures and imaging on hold. Emergency departments also saw a noticeable decrease in traffic during the pandemic’s highpoint. Concern remains, however, that local hospitals could see an uptick in novel coronavirus patients as business, churches, community centers, state and local governments begin to “re-open.” There’s also some anxiety to news about a multisystem inflammatory syndrome associated with the virus that effects children. “It’s rare, said one Council member. “But, parents are hearing about it and that fear and anxiety, I think, will be our biggest challenge.” Hospitals are adapting to conditions dictated by the virus. Patients are now tested 48 to 72 hours before scheduled procedures and patients admitted on the spot at emergency departments can expect to undergo a rapid test before admission. The old idea of a waiting room is giving way to new physical space that emphasizes social distancing. There are limits on the number of visitors entering the building and they are screened. The road back to normalcy will be slow as hospitals and other medical facilities re-start their business and fundraising operations. As one Council member described it: “There is a real impact to us by stopping things like elective procedures and imaging, the things that make us money. Slowing those things down definitely has been painful. The reality of the payer situation is going to be a lingering effect for sure.”
If there was any part of our economy that could use some good news, it’s this one. The pandemic has been hard on hospitality and tourism. However, the industry is now seeing a bit of an uptick. Of the 46,000 hotels shuttered during the height of the pandemic, half of them are re-opening, and demand for overnight hotel stays are up, as is weekend traffic to open beachfront resorts. The lifting of beach restrictions in Broward and Palm Beach counties is another encouraging sign, particular to major oceanfront hotels planning to re-open later in the summer. Unfortunately, the road to recovery remains long. It will be a tough rebound if, as one Council member put it, airlines won’t return to normal until 2025. Tourism also will have to regain the confidence of employees who will face fewer jobs that might again disappear if the pandemic’s second wave occurs. Attractions, too, are hoping a new wave of consumer traffic will keep their operations viable over the summer and during the rest of the year. Many operators have already lost revenue on what would be normally be their biggest revenue producing quarter. Now, they await the return of tourists while grappling with new social distancing rules that potentially cuts into their business. “We’re only allowed to be open at 25 percent,” one attraction operator told the Council. “At 25 percent, as you can imagine being in business, is a killer. It’s almost a showstopper.”
These are interesting times for an industry that prides itself on risk management. Unfortunately, the pandemic has raised questions and a degree of uncertainty across several lines of insurance as insurers grapple with coverage and a new wave of claims associated with the virus. So far, commercial insurance has been resilient. Overall, it has seen reports of between 5 to 10 percent reduction in revenue, which varies from firm to firm. Businesses specializing in industries like hospitality, travel and tourism, have seen sharp hits. Firms that are generalists or more diversified are doing better. Novel coronavirus-related claims are expected to lead to litigation in worker’s compensation area, and a growing number of insurers will resist paying business interruption claims due to the virus, a move that also will play out in the courts. A new industry product, called Parametrics, offers some form of pandemic coverage but at a price. “I think the ultimate solution is government stepping up to pay, and maybe in the future insurance will provide the servicing companies to help implement and execute the distribution of business interruption claims,” a participant told fellow Council members.
The second quarter offered a mixed bag for this economic sector. Commercial law firms specializing in employment are faring well as clients continue to question the pandemic’s impact on back to work issues, from rehiring employees to ensuring loan forgiveness under the federal Paycheck Protection Program. Other firms, even those dealing with government practices, are seeing declines fueled by tightening credit and lending practices along with a sense of uncertainty that is prompting buyers and sellers to back away from development deals. Regardless, many firms have initiated cost-cutting procedures, affecting equity partners, lawyers and support staff. Firms are still having to adjust revenue projections as some of their clients have asked for new payment plans or to renegotiate rates altogether. “Our phones are ringing off the hook,” one Council member said. “It’s very nice to be able to say that, but we also recognize many of our clients are struggling.” Other questions regarding the future of corporate law firms are topics on the table – from increased telework and shared office space to further salary and benefit cuts and the need for the same level of real estate. “Although we have to say that we have not seen the concern as to clients not paying at the level we were projecting, we are down about 15 to 20 percent,” said a Council member familiar with the profession. “But, it is better than anticipated.”
Business remains good in this sector and that’s a trend that is expected to continue in the short term. Having a diversity of clients helps, said one Council member who remembers the impact of 9/11 when his business was largely tied to one industry. “We’re hiring,” he said of his present-day operations. “We’re actually overwhelmed.” While the short term seems good, there are clouds hovering over the longer term. The pandemic resulted in clients closing their doors and those fortunate enough to remain open have sought relief in making payments. Raw material costs were up in the previous quarter and the current economic downturn has helped inventories. While labor costs are tolerable, it’s still an expense, particularly in the new normal of COVID-19. “The only way out of that is through the application of technologies that reverse the stream because if we don’t the price of playing poker is going up,” said another Council member involved in manufacturing. New technologies bring another concern: the need and costs associated with re-training a competent workforce. As one participant put it: “One problem we had before the pandemic, it wasn’t the size of the workforce but the mix.”
This sector is holding its own. What had been an industry that had seen a growth slump between 25 and 35 percent, is now seeing a strong upturn in boat manufacturing, maintenance, boatlift operations and propeller sales. At a time when social distancing is still key to fighting the novel coronavirus, boating is seen as the ultimate mix of outdoor recreational fun and sheltering in place. Many American and foreign yachts are now docked in the United States, and the pent-up demand is expected to make for a strong yachting season in South Florida this year. “People are able to be COVID-19-safe on their boats, a Council member who knows the industry. “So, boating right now is fantastic. On the weekend, there are hundreds and hundreds of boats out. Once [government officials] allowed us to go out on the boats, it opened up well. Being an essential industry really saved us.”
Restaurants & Live Music
Perhaps no other industry has taken a bigger beating during the pandemic than restaurants. Three decades of jobs were lost in the past two months, and the sales fell to their lowest level in more than 35 years, according to the National Restaurant Association. It’s just as bad for the musicians, singers, technicians and other support personnel in the live-music sector. Most live concerts have been put off until next year, and the best estimates for these workers who rely on live gigs at restaurants, clubs and other venues is that their industry won’t fully re-coup before 2022. As the nation re-opens, the road back for restaurants will be long and hard. Fortunately, there is pent-up demand from former and potential customers who are tired of sheltering in place and cooking at home. However, convincing those customers to return to the familiar dine-in experience will prove costly and time consuming as restaurant owners find ways to train, pay and protect employees while integrating new safety and social distancing elements into a business model that still relies on large numbers and tight spacing. “I’ve ordered everything that can give the public the impression that we’re safe and are a viable space to be in,” a Council member told the group. “How we market that to the public is our challenge right now.”
The outlook is optimistic. Stores that have re-opened have seen brisk business from the pent-up demand of customers anxious to return to a pre-COVID lifestyle. Several of the big retailers that anchor malls are back. Others are scheduled to re-open soon as they bring back furloughed and laid-off employees, re-stock inventory and re-arrange store spacing to meet new social distancing rules. Retailers are making necessary investments and continuing innovative strategies, like curbside service and improved cleaning and sanitary procedures to boost consumer confidence and ensure public safety. That’s the good news. The bad news is that a number of retailers simply won’t survive the effects of the pandemic. Mall operators here and across the country are seeing a number of retailers either forgo rent payments or commit to three-month payments to save money. “To be honest, there will be some retailers and restaurants that aren’t going to be open after this,” one Council member familiar with the industry. “There are retailers I have concerns about that may be open now, but we’ll see what happens.”