People have been asking about the future of travel leisure and Vail in particular, so I thought it appropriate to comment having grown up in Los Angeles and living in the Vail Valley for the past 25 years. Despite our reputation as a playground and capital preservation harbor for the ultrawealthy, this miniscule demographic (.6%) is not representative of the Top 10% families who control 70% of all wealth in the US and for the most part drive demand for seven digit luxury good spending.  The question that I think people are really asking is “what will money do after the pandemic is under control?”.  Historically our customer base has been well paid professionals but not uber multi-million dollar families.  The enthusiast profile can be characterized as lawyers, doctors, corporate VP’s and small business owners all of which are paid well but are not necessarily $10m investible asset rich.  Over the past 25 years “the wealthy have been getting wealthier” driving luxury good spending to levels that few Americans can afford which is the Vail Valley’s blessing and bane.  As to vacation home ownership today you can’t just be a lawyer; you probably have to be a partner.  Doctors will have to own a piece of their practice or the clinic.  Being a corporate VP may not be enough unless they are the EVP which means the boss of bosses.  While in the past small business owners could have had 5 employees, today they will have to run a much larger company to buy world class ski proximate real estate.

My back of the napkin calc points to a 90% loss of our traditional customer base which if true should be reflected in a flattening of buyer demand if not outright reductions in pricing which have been going in the opposite direction.  Concentrated wealth is growing so maybe that trend is countering what should have been a softening market?  Is it our exponentially expanding international customer base?  Maybe it’s the very low cost of financing or growth of investible assets?  Did the longest running bull market run in history artificially inflate consumer confidence in their wealth and employment income?  Has the intergenerational transfer of family assets begun?  These are difficult questions to answer and are societal issues to contemplate as the rebuilding of America unfolds.

Any predictions based upon historical trends are now COVID-19 irrelevant.  It’s impossible to measure how much capital structure and/or employer destruction has or will occur.  Is fear so pervasive that people will want to live in less congested highly affluent areas such as Vail, Aspen, The Hamptons or Napa Valley knowing they can effectively work on-line?  Will a 30 trillion dollar budget deficit drive inflation to double digit numbers?  What will the credit markets look like as we continue to print money to counter the worldwide pandemic?

While I don’t see a systemic breakdown coming no one knows how badly consumer confidence will be affected.  Over the next couple of years demand for travel, leisure and resort home ownership will suffer as people wait for portfolio and employment income levels to recover which only makes sense in a time of fear and panic where anything can happen.  What I do know is that DURATION is the critical issue.  If the world comes out of COVID-19 by year end, normalcy could return relatively quickly.  If businesses remain shuttered into next year the damage could takes years to restore.  Bloomberg News talking heads are pontificating a V-shaped cyclical downturn pattern, which is a violent decline followed by a swift recovery, but in my opinion seems to be wishful thinking.  It takes months to build a house but only a couple of hours for it to burn down.  Could this a metaphor for the global economy?

Long range forecasting requires accurate and detailed information, so be wary of trusting what will be a barrage of predictions that should be taken with measured skepticism.  The pundits are only guessing so it makes sense to prepare for the worst while hoping for the best.  No matter how all of this ends it is going to be a turbulent and volatile ride, so fasten your seatbelt because I expect it is going to get worse before it gets better with timing and magnitude impossible to predict.

As a real estate analyst and urban economist with a minor in monetary policy from University of Southern California, I have had a lifelong fascination with the Baby Boomer generation who changed the world after WWII and continue to dominate nearly every aspect of modern day living. Humanity has benefited and endured more advances in my lifetime than in the aggregated history of mankind. Human beings are having trouble keeping up which is why 40% of Americans yearn for the simpler days of yesteryear as evidenced by their political leanings which is in essence a mass protest against rapidly changing lives and technological dislocations.

We are Darwinian creatures which makes us self-interest driven yet empathetic during times of crisis when survival of the tribe is at stake, making for confusing and impossible to predict outcomes. Animals stampede and so do humans when threatened with frightening unknowns or issues they don’t understand; it’s in our DNA. As an avid follower of the economic community, one of whom happens to be our neighbor and without a doubt is one of the smartest humans I have ever met; not nerdy IQ smart but rather a real world economic forecasting savant. We had dinner Thursday night and as I left asked whether it would be better to overdose on OxyContin or razor blade my wrists given that his predictions were beyond scary as to what is going to happen as the Coronavirus spreads. This is a summary of what Julian Brigand had to say as a proven futurist.

You haven’t seen anything yet with panic accelerating on a massive scale over the next 2-3 months. More social isolation will be necessary if the health care system is not to be overwhelmed. With roughly 330 million US citizens at a 20% infection rate, 65 million people will need to see a doctor. If 5%-10% require hospitalization that means 3-6 million potential patients and should 20% of those cases require ICU admittance, then 600,000-1,200,000 people will need advanced care in a system that has about 50,000 beds. The CDC is trying to elongate the outbreak so as to prevent a systemic breakdown because if it does physicians will be forced to make triage decisions as to who lives and who dies which is going to make the public very unhappy.

The bad news here is the goal of longevity. As noted in in a prior email this is not a structural economic correction but rather a health epidemic that could burn out by year end. 2020 will be an economic disaster as global supply chain disruptions continue, employees furloughed, and business shuttered as evidenced by Vail Resorts closing all 37 ski resorts for a week while they reassess. The market opened Monday morning with another staggering sell off. The S&P is down 18% over the last 17 days and 30% from its 3300 index record high.

The only good news is that there will be opportunities to buy underpriced assets that will bounce back after the virus gets under control and it will. With the FED taking massive action it just announced a 100 bhps interest rate reduction while committing to increasing QE by $500m which includes mortgage backed securities that could ultimately drive rates to 2%. The question for places like Vail is that the rich typically don’t sell in downturns and if this a one or two year event that duration might not be long enough for real discounting to appear. During the GR it took two and half years for distress to set in because the wealthy don’t run out of money in months but rather years and are prone to riding out recessions rather than taking losses on long term hold assets they don’t have to sell.

While no one can predict magnitude and timing train wrecks can sometimes be seen coming if you are paying attention. The most reasonable plan is to wait for more information, try to predict a bottom, then buy distressed assets that are overly discounted. My hope is to come out of this mess whole, which is going to go down as nothing short of a historic black swan outlier event. The global economy would do well if it recovers by year end but depending on the carnage it might be 2021 before some semblance of normalcy returns.

While many of you are bound to disagree with these prognostications it only makes sense to wait until more information becomes available which is what I recommended during the summer of 2007. The hurricane is here, we’re all starting to hunker down, but waiting for the storm to pass as the hard part.

When owners decide to sell, their thought process typically follows this emotional pattern. Buyers tend to be in the mid-fifties and sell in the 70’s. After the initial purchase the family uses the property 2-4 weeks a year for about 10 years. Years 11-15 is when conflicts begin to arise with use declining due to changing family dynamics, career entanglements, ageing children the arrival of grandchildren, physical fitness and other emerging conflicts. Years 15-20 most families rarely use the property where what once started as a dual benefit stream purchase transforms itself into just another portfolio asset. Elderly parents know it is time to sell but are reluctant to do so with given nostalgia and fond memories of younger years and time with family and friends who are now too busy to visit. With the owners now in their 70’s altitude, fear of getting hurt, retirement and with few visitors, they decide to sell which doesn’t come easily and not without the urge to test the market with a high price because they are not in a hurry and feel that a buyer will have to pay if they want their very special place; like children theirs is special the best looking kid in class.

On average it is not unusual for homes to stay on the market 1-2 years which mostly sell between June and September. While 30% of the inventory goes under contract during ski season these tend to be ski proximate or walk to lift condominiums. Sellers oftentimes miss the summer selling season due to unrealistic pricing and/or dated condition forcing them wait until that following summer window reopens which is the reason for the high number of days on market. It takes 9-15 months for sellers to test the market, accept the fact that one of their prized possessions will soon be gone, while settling on the right price which is why new listings are problematic for our buyer clients.

During the Great Recession the market went illiquid starting Q1 2008 and did not really begin to percolate until mid-summer 2010. Rich families don’t run out of money in months but rather years with prices dropping by about 17% during the Great Recession. Most owners were not willing to sell nor did they need to at highly discounted valuations with the market suffering 30-60 months of gridlock until the recovery set in. Ski proximate real estate has regained all of the Great Recession discounting and are in fact setting record 20%-25% premium highs. If you have the holding power very few owners have ever lost money in Vail or Beaver Creek and have in fact made a surprising amount of money on these homes which was not their original intention.

If you want to know how a world class resort market is going to do over the long run, study the traffic generator which in our case is the ski company. If Vail Resorts increases demand for their products, goods and service (VR has 38 separate operating entities) and the industry has fixed supply (ski property may be some of the rarest real estate in the world because there are thousands of miles of beaches, thousands of golf courses, but only 3 world class ski resorts in the US) then everyone wins including vacation home owners, small business owners, locals, restaurants and real estate in general. If the ski company hurts demand as American Ski did when it laid off 25% of their Steamboat workforce resulting is a 13% drop in property values, we all lose. VR is a Fortune 1000 company with deep pockets, dominant market share, experienced personnel, superior management and the largest market share in North America including 40% of the CO market alone. We expect their success formula will continue with continuing dominance of the industry worldwide.

This is just a smattering of the issues that drive our vacation home investment advisory and consulting service platform and welcome your questions of which there are sure to be many.