There is palpable pessimism in commercial real estate (CRE). With high inflation and increasing interest rates, CRE investors are worried about a potential recession.
Around 68% of players in the CRE sector believe that the United States is already in a recession or will be by the end of 2022, according to the 44th Economic/Real Estate Poll by Morrison Foerster from June to August 2022.
The definition of a recession is two successive quarters of negative economic growth. By this measure, the US economy is already in a recession.
However, the official National Bureau of Economic Research declaration may come for a while as they consider various other factors.
According to JPMorgan Chase's head of Commercial Real Estate, there is a 50% likelihood of a recession in 2023.
But there's good news: The downturn should be relatively mild. While still not ideal, the labor market should be able to weather this recession better than past ones.
According to their projections, the unemployment rate is projected to increase by only 4-5%.Many experts agree with this forecast, saying that the next recession will be shorter and shallower than the last (the Great Recession of 2008). Several indicators point to this.
First, the consumer and business sectors—including banks—now have significantly less leverage than before the Great Recession began. Their previously high leverage caused the 2008 recession to be more severe.
Second, because labor markets have been highly tight compared to the previous year, and businesses have had a difficult time finding and keeping competent people, it's unlikely that employers will drastically reduce their staff.
How exactly might a recession affect the commercial real estate industry?
First, a major economic downturn—no matter how shallow—will likely reduce the demand for all real estate asset classes.
High-interest rates will also aggravate issues. If the Fed continues to raise short-term interest rates, borrowing money will become more expensive, leading to a decrease in activity among industries with significant fixed assets.
In addition, CRE lending may decline as refinancing at higher rates becomes less and less appealing. Different types of properties will be affected differently, requiring different preparation strategies.
With consumers demanding faster product turnaround, industrial properties have continued to stay strong. But they may feel the pinch during a recession, as consumers spend less money on elastic goods.
Elastic products show a significant change in demand or supply in response to changes in their prices. These are typically non-essential items or goods for which there are readily available substitutes.
Some examples include soft drinks, cereals, clothing, electronics, and cars.
However, these products are not necessities, so a significant price rise often causes consumers to look for cheaper alternatives or stop buying them altogether.
As consumer demand wanes, inventories are reduced, and the need for industrial space decreases, potentially causing declines in the industrial CRE segment.
Morrison Foerster's June–August 2022 Economic/Real Estate Poll reveals that 59% of investors think the US retail sector has risen from the bottom of the CRE cycle.
Neighborhood retail centers located in densely-populated areas continue to perform well, but this cannot be said for all retail properties.
A recession would make things worse for B- and C-class malls that are already struggling.
A recessionary environment will no doubt dampen the growth of the retail segment, but from now on, the bigger concern for long-term CRE investors is how retail is evolving—and how quickly it is changing.
On the bright side, retail is steadily evolving to include more omnichannel and experiential elements, which should keep brick-and-mortar stores relevant for the foreseeable future.
But even after more US customers return to physical stores now that the pandemic seems to be ending, retail CRE investors must remember that the line between their physical and digital stores is becoming increasingly blurred.
The future of retail space must offer consumers convenient, multichannel choices, immersive consumer experiences, and quick delivery at their homes.
According to the latest Morrison Foerster surveys, 81% of investors believe there are still many opportunities in the multifamily apartment segment as this sector remains in an expansionary phase.
On average, a single-family home costs 43.7% more than it did in before COVID-19, with entry-level dwellings at the bottom third of the price range seeing the biggest jump in cost.
This is why an unprecedented number of people who typically buy single-family homes are instead choosing to rent, increasing the demand for multifamily properties.
Aside from this, other economic variables may also positively influence multifamily dwellings. Owners and operators of multifamily real estate may benefit from the headwinds the larger economy is now facing.
For example, construction delays and higher building costs tend to limit supply, which drives up rental rates on existing homes. Inflation also causes rents to increase.
Offices are also changing as organizations strive to find a new normal. More than a mild recession, the trial-and-error phase of employers balancing varying work arrangements (in-person, hybrid, and remote) is really influencing the office property segment.
That said, a recession may cause a slump in hiring, which may cause some companies to delay plans to expand their offices, at least temporarily.
Class A office buildings with a wide range of services and facilities should continue to do well in a recessionary environment, with few vacancies.
However, some employers may look to B and C properties to save money if the economy takes longer to recover.
In addition, if tenants drastically reduce employment, the already-ailing office sector will likely encounter additional obstacles.
When the economy contracts, people need affordable housing more than ever. This is an opportunity for CRE investors to increase supply.
Even during tough economic times, people typically wait for vacancies in lower-priced multifamily complexes.
And as market rent rates go up and incomes drop, demand increases, even more, making ROI in this segment much easier to attain.
Furthermore, your portfolio's value rises due to increasing interest from investors in recession-proof CRE properties.
Affordable housing can also benefit from reliable cash flow. Most low-cost housing qualifies for tax credits or Section 8 subsidies, so rental income is steadier during a recession.
On the other hand, luxury rentals frequently struggle to fill vacancies and have higher rates of rent defaults during an economic slump.
When recession fears rise, keeping your CRE business running at a high level is critical. However, long-term thinking is also critical for commercial real estate during this time.
One of the key things is to avoid overstretching your balance sheet as the economy slows down.
Having the cash flow and liquidity to weather a recession is key so that you can take advantage of CRE bargains in good markets and neighborhoods later on.
There are CRE investment opportunities even in a shaky economy. Having a dependable source of CRE financing ensures you can get funding quickly to take advantage of such opportunities.
Capital Investors Direct, one of the trusted commercial hard money lenders in Maryland, is a major provider of customized loan solutions to CRE investors nationwide.
In addition, we provide funding alternatives that may not be available through conventional banks. Unlike traditional lenders, we close quickly so you can access the money you need to fund time-sensitive projects.
Our simple application procedure makes everything seamless. And because we are in the CRE business, we understand your project and unique concerns as a CRE investor.
Our loan structures are highly customizable for different requirements and situations. We help companies obtain financing for commercial construction and development projects.
Utilizing updated finance technologies, we offer a broad scope of investment opportunities to fit your commercial real estate financing requirements.
We have a bridge, hard money, construction, jumbo, stated income, and permanent loans–no matter what you need, we can help.
Our CRE placement professionals will work with you every step of the way to ensure that your project is financed in the most cost-effective manner possible.
By working together, we can identify opportunities for cost savings and develop a proposal that meets your needs and requirements without sacrificing quality—all while making the process as effortless as possible.
At Capital Investors Direct, we give commercial real estate investors what they need to succeed when banks say no.
Expect efficient communication, flexible terms, transparency (no hidden fees), and excellent customer service from commercial property loan specialists who genuinely understand the CRE market.
Talk to us today.
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