According to one market observer, investors “shouldn’t be concerned of an oncoming recession” and instead should think about the economic outlook over the next 3, 5, and 10 years.
Because there are so many different economic crosscurrents at play, it’s difficult to predict whether and when the next recession will occur. According to John Chang of Marcus & Millichap, these factors make it very hard to anticipate a recession, and even while “the risks are mounting,” a recession is not a given.
On the one hand, according to Chang, job growth is strong, with 488,000 new positions added each month on average this year. 3.6 percent is the current unemployment rate, and 5.2 percent is a significant pay growth rate. Additionally, despite recent stagnation in retail sales, they are still growing by almost 8%.
According to Chang, ” “Those are all positive economic readings pointing to a steady growth outlook.” Chang also notes that on the other hand, we have rising interest rates, a declining stock market, a record-high inflation rate of 8.5 percent, and declining confidence levels. There is in many respects a fear element at play that can force individuals to cut back on their spending and bring about a recession.
Therefore, is it really important if the US experiences a recession? Chang says it depends on the situation.
Chang claims that the current situation is unlikely to experience the liquidity shortage that the Great Financial Crisis did, which limited real estate investment. Although there are many different reasons and repercussions for recessions, Chang believes the US is likely to see one similar to that of the 1981 or 1990 downturns. Strong growth and rising inflation in the years before both of these periods influenced the Fed to raise interest rates aggressively, as we are seeing today. Chang observed significant variation among property types, with apartments, for example, holding up well in the 1980s and dipping mildly negative in 1991 – though “nothing like the hit the sector took in 2009,” he says. Yields softened in both recessions, but not to the extent of the decline in 2009.
The location and asset will determine a large portion of the risk to CRE investors. However, according to Chang, “in general, real estate has generated good returns through most recessions.” “And even when returns fell, there was typically strong, steady growth in its wake. Therefore, yes, economic downturns do affect commercial real estate, but not nearly as much as we may think.
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