Why a Recession May Give CRE an Advantage
As an investor, you don’t want to wish anyone bad luck but it might comfort you to know that you may benefit if the economy declines.
While nobody wants a recession, they are at times a natural result of the business cycle. Although the pandemic recession was an exception in that regard, there is a good probability that the United States could go through another one in the near- to mid-term.
In a recession, the strongest companies will probably profit first, albeit at the expense of weaker ones. According to Jahn Brodwin, co-leader of the real estate solutions business and senior managing director at FTI Consulting, “patience and working capital are typically the two ingredients that insure a successful real estate investment. When an investor lacks one or both of these during a recession, it can lead to forced sales at inopportune times at less-than-optimal prices or worse, lead to foreclosures. The corollary to that, of course, is that those with the funds available today will likely have some excellent buying opportunities.” The CEO of the Klotz Group of Companies, Jeff Klotz, contends that the typical ebb and flow is “healthy.”
According to Klotz, “A recession in today’s economy will slow inflation and generally level out the economy which is good for everyone… It will also ease up on the challenges created from the current ‘boom economy’ and make the availability of reasonably priced goods, materials, and labor much more accessible which is something that is extremely beneficial for commercial real estate.”
While wood prices have decreased and are now at 2018 levels rather than the absurd heights of last summer, there are still significant supply chain issues for many other building products and materials. Eddie Lorin, founder and CEO of Alliant Strategic Development, concurs that removing pricing pressure off materials, combined with greater stabilization of construction labor and increased rents, is “really not that bad for developers of market rate apartments.” A general slowdown could provide some breathing room for the whole supply chain.
Naturally, with all these factors in consideration, it is assumed that a recession is imminent. Not everybody is confident. Palladius Capital Management CEO, Nitin Chexal asks, “What recession?… Unemployment is sitting at 3.5% with several million job openings. We are seeing supply chain issues begin to moderate. Rental demand from multifamily to student housing to industrial remains robust. The overall health of the economy continues to be favorable for commercial real estate.”
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