The New York Times - USA (2020-12-02)

THE NEW YORK TIMES BUSINESSWEDNESDAY, DECEMBER 2, 2020 N B5

VIRUS FALLOUT

street retail, and the public serv-
ices that maintain it all — when
so many individual elements of
the ecosystem are under severe
strain.
Boka Restaurant Group in
Chicago had 2,000 employees
working at 20 restaurants before
the pandemic, and in the immedi-
ate aftermath of shutdowns in
March furloughed more than
1,800 of them, said Kevin Boehm,
a co-founder of the group.
But as the weather warmed
and Chicago allowed extensive
outdoor dining, the company’s
restaurants were able to claw
back. By midsummer, sales were
down only 35 percent to 40 per-
cent compared with normal. A
refundable loan through the
federal government’s Paycheck
Protection Program helped it
meet rent and payroll obliga-
tions.
Now, the federal loan is long
gone, the weather has turned
cold again, and a new wave of
Covid-19 infections has put a pall
on indoor dining. Sales are down
90 percent from normal levels.
“I’ve spent the last two days
sitting in a room with employees
who are being furloughed or
having a salary reduction,” Mr.
Boehm said in mid-November.
“This is happening right now.
One of our restaurants is one of
the highest grossing in America,
and last night we did $900 of
sales. On a normal night, that
restaurant would have done
$50,000.”
For restaurants, many ex-
penses move pretty much in line
with sales, like ingredient costs
and labor. But others, especially
rent, do not; in a healthy restau-
rant, rent would amount to 6
percent to 10 percent of revenue.
When revenue collapses but
fixed costs do not, as is the case
now, a restaurant cannot survive
for long. At some of his restau-
rants, rent is now an untenable
50 percent of sales.
“If there’s no federal assist-

ance, it will wipe out a very large
portion of the independent
restaurants in America,” said Mr.
Boehm, who with dozens of other
restaurateurs formed the Inde-
pendent Restaurant Coalition to
seek help from Congress. “We
can’t make it to April or May.”
If there are widespread restau-
rant failures, as the coalition
argues is inevitable without a
major new federal rescue, it will
create an ugly situation next
summer. You would simulta-
neously see hungry diners eager
to return to restaurants; vacant
former restaurant spaces; unem-
ployed restaurant workers; and
restaurant entrepreneurs
bankrupted and in no position to
start over.
A related challenge could hold
the national economy back even
after a vaccine is widely avail-
able. There has been a slow-
moving crisis in some commer-
cial real estate sectors, as missed
rent payments start to pile up.
When retailers and restau-
rants miss rent payments, or
hotel rooms sit empty, property
owners can typically endure for a
while, but defaults are inevitable
if those conditions persist. Ac-
cording to Trepp, a commercial
real estate research firm, that is
now starting to happen.
The delinquency rate for mort-
gage securities backed by retail
real estate was 14.3 percent in
October, up from 4.6 percent a
year earlier. Delinquencies for
lodging properties were 19.4
percent, up from 1.5 percent.
And that reflects missed loan
payments before the latest surge
in virus cases and renewed lock-
downs. Moreover, the new wave
of trouble comes after commer-
cial property owners have al-
ready taken dire steps to keep

making debt payments, like hotel

owners making loan payments

out of reserves meant for up-

keep.

In other words, brace for a

wave of commercial foreclosures,

which could create closings and

other disruptions as new owners

seize control of shopping malls,

hotels and other properties.

“It’s already started,” said

Manus Clancy, a senior manag-

ing director at Trepp, referring to

foreclosures in retail real estate.

“Borrowers are now cash-flow

negative because of bankrupt-

cies, so they’re throwing in the

towel or looking to restructure.

That part of the problem remains

after we have a vaccine.”

That could mean more malls

and shopping centers that are

converted to other uses — shifts

that would have happened even-

tually anyway, but are being

accelerated. It’s hard to get back

to shopping at your local mall —

or maintain a job there as a store

clerk — if the mall is closed while

a new owner tries to figure out

how to build a retirement com-

munity on the land.

“There are these little land

mines across the economic land-

scape,” said Joe Brusuelas, chief

economist at RSM, an accounting

firm that services midsize busi-

nesses. “Even if they don’t mat-

ter at the macro level, at the local

level they can matter a lot.”

State and municipal govern-

ments face similar lagged effects,

as the economic activity that has

not occurred since March results

in less money coming into tax

collection offices — with the

exact timing depending on how a

given state funds itself.

Businesses must pay sales

taxes relatively promptly, for

example, so the contraction in

activity has already showed up

in those collections. But income

tax payments arrive with a long-

er lag, which pushes some short-

falls into spring 2021. And while

a fall in commercial real estate

prices could affect property tax

collections, that would play out

over years.

“States and local governments

are thinking of this as a multi-

year problem,” said Tracy Gor-

don, a senior fellow at the Urban

Institute. “It’s mainly because of

the way tax systems work. Most

are inherently backward-look-

ing.”

Projections vary widely de-

pending on the severity of the

virus in a state; the composition

of its economy; and its tax sys-

tem. But most states are expect-

ing revenue to fall in the fiscal

year ending in 2021, with several

projecting 10 percent to 20 per-

cent declines, according to data

compiled by the Urban Institute.

The federal government,

which unlike states is free to run

a fiscal deficit, could close some

or all of that gap. Democrats

widely support such an action. In

the absence of that, weak reve-

nue collection would mean states

and localities would probably

need to cut deeper, adding to the

1.3 million jobs they have already

slashed since February. Those

job losses would arrive just as

public health restrictions are

loosening and the economy is

otherwise surging ahead.

At the same time, the indus-

tries that have benefited most

from the pandemic could see a

reversal of fortune. As Ameri-

cans have halted spending on

services like travel and sports

attendance, they have redirected

much of that spending toward

physical goods, with particularly

strong numbers evident for food

meant to be consumed at home,

home improvement goods and

exercise equipment.

In the third quarter, Ameri-

cans’ spending on goods was up

6.9 percent from a year earlier,

while services spending was

down 7.2 percent. If those pat-

terns were to fully reverse to

pre-pandemic levels, goods-

producing industries would

experience a pullback in 2021

equivalent to what the services

industry experienced in 2020.

The good news is that even as

those goods sectors have in-

creased production, they knew

that the surge in demand might

be temporary and have avoided

long-term investments.

In a conference call, Jeffrey L.

Harmening, the chief executive

of the packaged food giant Gen-

eral Mills, told investors that the

company was expanding its

internal production capacity only

for products for which there had

been rising demand before the

pandemic, like cereal and fruit

snacks.

For other products that have

had a temporary demand surge,

they sought outside suppliers.

“We’re going external, not due to

lack of confidence, but primarily

because it provides greater agil-

ity,” such that if demand doesn’t

stay high, “it’s easier to get out

and we don’t spend the capital

doing it.”

Still, plenty of workers who

have enjoyed lots of overtime

because of the pandemic could

see a reversal, with bicycle man-

ufacturers and grocery store

cashiers experiencing a loss of

income just as flight attendants

and bartenders regain theirs.

Combine all these forces, and

the story is one of both hope and

despair.

“We’re still in sight of both the

good place and the bad place,”

said Adam Ozimek, chief econo-

mist for Upwork, a platform for

temporary labor. “If we pass

another round of business relief

and help for households, there is

a really strong possibility we’re

going to make it through to the

vaccine with an economy that

doesn’t have massive long-term

damage. If we don’t do that, we

could still end up in a situation as

bad or worse than the Great

Recession.

“It’s totally up for grabs.”

There is now a light at the end

of the tunnel, in other words, but

it is still an open question exactly

how far the tunnel goes and how

bright the light will shine when

we arrive.

Economic Recovery May Hinge on Congress’s Moves This Winter

PHOTOGRAPHS BY LUCY HEWETT FOR THE NEW YORK TIMES

Kevin Boehm, top center, is a co-founder of Boka Restaurant Group in

Chicago, where sales are down 90 percent from normal levels. Left and

above, Swift & Sons steak house, part of Boka, has cut 70 of 75 kitchen jobs.

The mayor of Los Angeles, Eric
Garcetti, said early Tuesday that
the city would reopen a coronavi-
rus testing site at Union Station, a
major transit hub, after residents
criticized a decision to temporar-
ily close the site during a film
shoot.
The movie, “He’s All That,”
which features the TikTok star Ad-
dison Rae and is a reboot of the
1999 romantic comedy “She’s All
That,” had received approval to
film inside and outside the station
on Tuesday, the city and county’s
film office said. About 170 cast and
crew members were expected to
take part in the movie scenes, the

film office said.

The reversal came after a

homeless outreach and advocacy

group, Ktown for All, criticized the

decision to close the site and

shared a copy of an email that it

said a resident received Monday

afternoon from the company that

operates the testing site. It said all

testing appointments at the sta-

tion for Tuesday had been can-

celed because of an event there.

The group said that the move

showed that the city had mis-

placed its priorities at a time when

hospitalizations for the virus are

on the rise, and that the decision to

close the site for a day made it

harder for people who rely on pub-

lic transportation to get tested.

“It’s truly one of the only Covid

testing centers within the city of

Los Angeles that is really accessi-

ble by public transit,” Devon Man-

ney, a spokesman for the group,

said in an interview on Monday

night. “This is the L.A. that we are

constantly fighting against.”

Philip Sokoloski, a spokesman

for the film office, which is known

as FilmLA, said on Monday night

that neither the office nor the loca-

tions team for the production com-

pany had been aware that the sta-

tion was one of the city’s virus

testing locations, and that neither

was involved in the decision to

close the site.

A representative for Miramax,

which is releasing the film, said

the studio had not requested the

halt to testing.

Union Station is one of the city’s

10 permanent testing sites and

five pop-up locations. City officials

did not say who had made the de-

cision to suspend testing at Union

Station.

In a tweet, Mr. Garcetti said the

504 people who were scheduled

for a test at Union Station on Tues-

day could visit the site as planned.

City officials said about 350 daily

tests are conducted on average at

Union Station, which they said ac-

counted for less than 1 percent of

the more than 35,000 tests a day

that are done in Los Angeles.

Los Angeles Yells ‘Cut’ Before Film Shoot Can Shut Virus Testing Site for a Day

Waiting at Union Station in Los Angeles last week for coronavirus tests.

ETIENNE LAURENT/EPA, VIA SHUTTERSTOCK

By NEIL VIGDOR

and KWAME OPAM

Taylor Lorenz contributed reporting.

The Upshot provides news, analysis
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and everyday life.
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‘There are these little

land mines across the

economic landscape.’

Joe Brusuelas, chief economist at

RSM, an accounting firm that

services midsize businesses.

50%

The portion of revenue some

restaurants are paying in rent

during the pandemic.

FROM FIRST BUSINESS PAGE