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A Recession May Be Coming, but Not for Commercial Real Estate Investors

Financial headlines have been full of worries about a possible recession and a downturn in commercial real estate markets. Recessions often precipitate a decline in real estate markets, but long periods of increasing construction and rising property prices may pose risks of their own. Stock prices fell sharply in December in a bout of turmoil that both reflected these concerns and fed the fears.

Lately, though, we’ve seen increased evidence that this was a false alarm. Sure, there has been troubling economic news from abroad, interest rates have moved higher, and the economic expansion is one of the oldest on record. But the challenges today are typical of the types of risks that the economy faces regularly, without heading into a recession. Indeed, as former Fed Chairman Ben Bernanke said recently, ”I don’t think economic expansions just die of old age… they get murdered.”

What are the typical weapons found at the scene of such a macroeconomic crime? A detailed reading of the historical record indicates three types of excess that have preceded every recession and commercial real estate downturn: overbuilding, overheating, and over-indebtedness.

There still could be bumps in the road, of course. Key risks to keep an eye on include possible impacts of trade wars and Fed policy, especially if inflation should rise again. And while commercial property prices today do not look overheated, an acceleration in price growth above and beyond net operating income could signal trouble ahead. For now, however, 2019 appears set for a favorable performance for the economy, and for commercial real estate.

Calvin Schnure is Senior Vice President, Research & Economic Analysis at NAREIT. Read full article here.

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