The Physical Economy Is Done

Based on current trends, it's clear that the ongoing pandemic will linger into next year, if not longer. With economic activity already in the tank, what lies ahead is anyone's guess.

However, what seems certain is that many of the societal and consumer behavioral changes that were slowly beginning to have an impact in the years preceding the outbreak will now unfold at a much faster pace. And the longer COVID-19 defines everyday life, the higher the chances that such changes will become permanent.

Let's consider.

AUTOMOBILES

When many think about Tesla’s transformational impact on today's market, what immediately comes to mind is that it has accomplished what so many others before could not: create a demand for an electric car. That's important because it helps to alleviate the devastating impact of climate change across the globe.

But the other thing that Tesla has done is wholly remake the car-buying experience. With its direct-to-consumer, internet-based model, nearly anyone in the world can order a Tesla from the comfort of their home.

What would you rather do? Visit a dealership and negotiate in-person with someone who, in many cases, has every incentive to boost their commission, which invariably ends up taking up a lot of your time? Or take your smartphone out of your pocket and, in a few clicks, order a custom-made car?

This ease of service partly explains why Tesla's market value has quadrupled since March, while the share prices of the other big carmakers – including Ford, GM and Toyota – have all stalled during the same period. It also may be one of the reasons AutoNation keeps losing CEOs. The bottom line is the car buying experience will never be the same, and that's a good thing.

MOVIES AND ENTERTAINMENT

Disney’s decision to skip a theater release and put "Mulan" on its streaming service could be a watershed moment.

Pre-pandemic, movie theaters were struggling. Granted, they made money, but it was a no-growth industry. Today, they face an existential crisis, with most audiences having minimal appetite for sitting in a confined space next to a crowd of strangers.

If this trend crystallizes, a major revenue stream for studios could disintegrate – which may be a good thing in the long run. Not only would they adopt a more sensible approach to production (every studio would have to rethink spending hundreds of millions of dollars on a single project), but profits could increase since a direct-to-consumer approach would boost margins.

If the box-office movie model fizzled out, it would benefit all streamers — including Disney+ — because their approach to production is more sensible.

RETAIL / COMMERCIAL REAL ESTATE

If it wasn't clear before, it should be now: Amazon isn't just the future of retail, it is retail. According to its most recent earnings report, the company generated over $89 billion in revenue. That's enough to give everyone living in its home city of Seattle almost $120,000.

The shutdowns are the final nail in the coffin for many former brick and mortar stalwarts, including J.C. Penney, Brooks Brothers and Neiman Marcus, as well as Ann Taylor and Lane Bryant parent, Ascena – all of which have filed for bankruptcy this year. More national chains are likely to follow suit in the coming months, barring a spectacular rebound.

This presents huge issues for real estate property owners, many of which have vast office space holdings. With so many retail tenants forced to skip rent payments and the future demand for office space likely to plummet, the commercial real estate market is a house of cards. It's only a matter of time before it crumbles.

UNCHARTED TERRITORY

Going forward, we will see two economies emerge – a digital one that will thrive and a physical one that will struggle for survival. This will go beyond cars, movies and retail, and permeate every aspect of American life.

Attorneys are doing depositions via video conference. Residential real estate brokerage firms are increasingly finding ways to sidestep human agents by offering virtual open houses and tours.

For years, banks have been reducing their physical footprint to cut costs and adapt to customers who want to handle their finances online. Even financial advisors, who once thought having office space and meeting with clients in person was non-negotiable, are starting to embrace working from home and video meetings on Zoom.

The list goes on and on. All of it vastly reduces the need for not only office space but also business travel, which in turn will hurt airlines and hotels.

In the end, it could mean that much of the infrastructure society has built over centuries becomes obsolete as we move into the digital age full bore.

By Ross Gerber, Contributor