There was one word on almost everyone’s mind in August: recession. It’s appeared in financial headlines throughout 2019 and now many factors are propelling it into the global dialogue. Those factors include the United States’ ongoing trade war with China and the yield curve inversion.
Some have also claimed commercial real estate is experiencing a dangerous bubble. A recession could exacerbate this. Let’s take a look at where we are and what a recession could mean for CRE.
The U.S. economy has been expanding for more than a decade. Low-interest rates have spurred growth in CRE, causing prices to go up by 111% since their lowest point in 2009.
But as property values have increased, capitalization rates (the rate of return on a real estate investment) have sunk to record lows. According to Forbes, low cap rates mean the market has overheated and will begin to correct itself.
CRE plays a vital role in the U.S. economy. So, some are wondering: could a bubble burst contribute to an economic downturn? Willy Walker, CEO of Walker & Dunlop, doesn’t think so. “If we continue forward at current leasing rates, occupancy rates, and debt levels, CRE will not be a contributing factor,” Walker said in a recent conversation with Bisnow. “But once a downturn begins, I think there will be several ramifications.”
What does a potential recession mean for CRE?
While consumers do spend less money during a recession, they still have basic needs to cover. They have to do things like buy food and clothes and get their hair cut. Because of this, Walker believes local retail will be OK, but small businesses will feel an impact.
Last year, Bloomberg reported that supply is catching up with demand for rental apartments. Rent increases are slowing, which will cause the market to soften a bit. Frank Stauff, President of Compass Construction, believes low-income and workforce housing will help cushion any impact a recession may have on market-rate housing.
As more retailers rev up e-commerce efforts, Walker thinks the appetite for industrial real estate will hold, even if it is at lower levels. A slowdown will impact all retailers—not only small businesses but e-commerce giants like Amazon and Walmart, too.
How else do you think a recession could impact CRE? Let us know by sharing your thoughts and tagging us @BuildoutInc on Twitter.