Economic Forecast: Industry leaders weigh continued effects of COVID

Industry leaders in Northern Colorado share many of the same concerns and reasons for optimism as the economy continues to reel from the COVID-19 pandemic.

Four business leaders from banking, commercial real estate, health care and accounting provided overviews of their sectors during BizWest’s virtual Economic Forecast event Tuesday.

The event — dubbed “The Road Back — Rebuilding the Economy After COVID-19,” included an industry panel moderated by Dallas Everhart, executive professor at the Monfort College of Business at the University of Northern Colorado.

Panelists included: 

  • Kevin Anderson, tax managing director, National Tax Office, BDO USA.
  • Spencer Levy, chairman, Americas Research and senior economic adviser, CBRE.
  • Shawn Osthoff, president, Bank of Colorado.
  • Kevin Unger, president and CEO, UCHealth Northern Colorado Region.

Key takeaways from the panel:

 

Commercial real estate

Levy said the various asset classes have performed differently during the COVID-19 pandemic, with some helped by the pandemic and others hurt by it. 

“The asset class that has done the best by far has been industrial,” he said, noting that CBRE a year ago expected industrial real estate to struggle.

“We got industrial wrong,” he said. “We thought industrial would have a tough year in 2020 and would come back strong in 2021. The reality was that industrial had a tough three weeks and then came back strong immediately,” with record prices, record leasing value and record land values.

Multifamily, Levy said, is itself a mixed bag, with assets in central business districts struggling and those in suburban environments performing better.

“Those types of multifamily are doing extremely well outside of the cities,” he said, noting that the economy continues to struggle with a lack of housing inventory.

“We see not only record prices for some of these suburban multifamily deals, but we expect that to continue for some time.”

Other sectors present challenges.

“Office presents the most complicated case,” Levy said, with the rise of remote work during the COVID-19 pandemic raising questions about whether and when those workers will return to an office environment.

“It’s a question that we’re all asking,” Levy said. “The truth of the matter is this: Nobody knows the answer on just how much work from home will diminish office demand. But I think it’s going to be less than many of the people who are saying it’s going to be 10, 20 or 30%.

“For most people, going to the office is a want, not a need,” he added. “That means people go to the office because it makes them more productive. It makes them attract and retain talent. It does a lot of other things from a productivity standpoint that are not impossible to do from home but much more difficult to do from home.

“So we think office is going to bounce back, but it’s going to take longer,” he added.

Levy said that Northern Colorado’s office market should bounce back sooner than other parts of the country, given the region’s population growth.

Necessity retail, Levy said, such as pharmacies and grocery, will perform well, but that the sector might begin to see “hybrid” retail, with traditional retail in the front and more warehouse-type sales activity in the back.

 

Health Care

Unger began his remarks on an optimistic note, saying, “We are hopefully nearing the end of this pandemic.”

He said the UCHealth system peaked at almost 470 COVID-19 patients, with Poudre Valley Hospital in Fort Collins, Medical Center of the Rockies and UCHealth Greeley Hospital now with 52 COVID-19 patients in-house, including 15 in intensive care.

Unger said the COVID pandemic has been different than anything the system had seen in the past. He noted that many COVID patients in an intensive-care unit are treated face-down in a prone position, on their stomach for 18 to 20 hours per day.

“Prior to COVID, we would prone a patient once or twice a year, so it was quite remarkable to have an entire ICU full of patients who are proned,” he said.

“During that first surge, we were certainly overwhelmed,” he added. “Every week we’re learning something new and tackling a new issue.”

Unger said the UCHealth workforce is being stretched “to the max,” with a team nursing program created to provide flexibility, and with various employees jumping in as needed.

Though COVID patients continue to occupy many beds, “We have seen virtually no flu cases this year,” he said, with few sports injuries and pediatric cases, given that children have not physically been in school.

“With that said, our intensive-care units are still very busy,” he said. “Not only are we treating COVID patients, but we’re treating all of the other patients who traditionally end up in our intensive-care units this time of year. We’re still very, very full, specifically because of the length of stay of our COVID patients.”

In addition to treatment of COVID patients, Unger said, UCHealth has added vaccine distribution into the mix.

“Our efforts right now are 24-7 on vaccine distribution,” Unger said, noting that the rollout is complicated, with people aged 70 and up, along with health-care workers, the top priority.

He said he believes that the state should soon be ready to expand vaccinations to other groups, particularly those 65 and older.

UCHealth is receiving both the Pfizer and Moderna vaccines, with distribution at 11 sites throughout the state.

“I do believe the end is in sight,” he said. “The quicker that we can get this vaccine out, the quicker we’re going to move through this pandemic. I think we’re nearing the end of this marathon.”

 

Banking

Osthoff said the banking sector has learned the importance of “adaptability, resiliency and perseverance” during the COVID-19 pandemic.

“Small businesses were dealt a difficult hand, and many were forced to shut down in 2020, severely impacting their business and ultimately their profitability,” he said.

Osthoff said that although some complain that the CARES Act and Payroll Protection Program had a difficult rollout, “From my perspective, this thing was an incredible feat to pull off. It was the largest program of its kind in history and was pulled off in a matter of a few weeks and really put a lifeline out there for a lot of small businesses.”

Banks were heavily involved in PPP loans, particularly community banks, he said.

“Community banks across the country carried the lion’s share of the weight in delivering the PPP loans to businesses that needed them,” he said. “Over 60% of PPP loans were delivered through community banks across the country,” with $10.3 billion in PPP loans just in Colorado, in more than 96,000 loans.

Osthoff noted that the next round of PPP, including second-draw loans, is ongoing now, with $284 billion earmarked for the program.

Osthoff said the banking sector in 2021 faces a significant challenge because of lower net interest margins, or the difference between what a bank pays out in interest on deposits and what it earns on loans.

“These lower interest rates have a very negative impact on our net interest margin,” he said.

In addition to weaker net interest margins, Osthoff said, banks have accelerated adoption of new technologies, including mobile banking and online banking that some customers might have resisted prior to COVID.

“Another challenge we’re seeing is credit quality,” Osthoff said, with some customers who have been impacted by the pandemic having difficulty making loan payments.

The new PPP program should help that, but banks overall have increased loan-loss reserves in anticipation of future problems, he said.

Additional competition for traditional banks include fin-tech companies that provide loans and lines of credit to businesses, and from online-only banks.

“I think we’re going to have to look at ways to be more efficient in our delivery,” he said, noting that Bank of Colorado has revamped its online mortgage process to make it more streamlined.

 

Accounting

Anderson said that to understand where tax policy will go under the new Congress and Biden Administration, it’s important to revisit the Tax Cuts and Jobs Act of 2017, which included provisions that will expire in the coming years, or that could be repealed.

“When the CARES Act came along, Congress decided that they needed to postpone the application of some of the more onerous provisions that came out of the 2017 legislation,” he said. “Some of those things are about to expire already.”

Other provisions of the 2017 law could be reversed under the new administration and Congress, he said.

“Some of those things are just ripe for reversal,” he said. “If Congress were to be looking for revenue-raising potential, they need to look no farther than the CARES Act.”

Provisions at risk include bonus depreciation for equipment and deductions for research and development, he said. With bonus depreciation, businesses can place equipment into service and take 100% of the cost of putting equipment into service as an expense in the current year.

“That is actually going to start to phase down after next year, after 2022, and then four years after that, it’s going to be gone completely unless Congress decides that they want to reinstate bonus depreciation.”

With the CARES Act, Congress provided PPP funds that were tax exempt for businesses, but the Internal Revenue Service said that expenses paid with those funds could not be deducted as expenses for tax purposes, arguing that it was “double-dipping.”

With the latest $900 billion stimulus package passed by Congress in late 2019, Congress reversed that latter decision, meaning that businesses can deduct expenses paid with PPP funds.

Anderson said that the new administration and Congress likely will consider some tax legislation in 2021, but it’s not the highest priority, with the focus initially being on immigration and COVID relief.

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