Monday Morning Scoop - Could There Be a CRE Upside to a Recession?
Could There Be a CRE Upside to a Recession?
No one wants a recession. And yet, they do eventually come as part of the business cycle. While the pandemic recession was an anomaly in that sense, the chances are reasonable that in the near- to mid-term, the U.S. could experience another one.
Those companies that are strongest going into a recession are likely first up to see a benefit, though at the expense of others. “There are two ingredients that frequently insure a successful real estate investment: patience and working capital,” Jahn Brodwin, co-leader of the real estate solutions practice and a senior managing director at FTI Consulting, tells GlobeSt.com. “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.”
Jeff Klotz, CEO of the Klotz Group of Companies, argues that the normal ebb and flow is “healthy.”
“A recession in today’s economy will slow inflation and generally level out the economy which is good for everyone,” says Klotz. “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.”
Eddie Lorin, founder and CEO of Alliant Strategic Development, agrees that taking 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.” While wood prices have come down and are currently at a 2018 level, rather than the insane heights of last summer, there are still significant supply chain issues for many other building products and materials. A general slowdown could give the entire supply chain some breathing room.
Of course, all this assumes that a recession is around the corner. Not everyone is so sure. “What recession?” asks Nitin Chexal, CEO of Palladius Capital Management. “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.”
By: Erik Sherman