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CRE Economist Puts Recession Odds At 60% By 2021

Award-winning economist Ken Rosen cites the U.S.-China trade war, profit-agnostic tech startups and left-wing Democrats as reasons why the U.S. economy will likely be in recession by 2021.

San Francisco, a market heavily reliant on what economist Ken Rosen calls 'the biggest tech bubble we've ever seen.'

Though Rosen points to a healthy overall economy and commercial real estate industry, risk factors like the impending 2020 U.S. presidential election endanger their very near-term prospects.

"No one wants to talk about it. One of the parties has a very big progressive wing who is anti-business," Rosen said in a forum on commercial issues and trends at the 2019 Realtors Conference and Expo in San Francisco Friday afternoon. "I think there's a rising risk of recession, and I think it's important we all realize that's the case."

Rosen qualified that rising risk as a 40% chance of recession in 2020 and 60% chance by 2021.

Several Democratic presidential candidates have policy ideas that could directly impact commercial real estate, like the proposal by Sen. Cory Booker (D-N.J.) to repeal section 1031 of the tax code and a call by Sen. Bernie Sanders (I-VT) for nationwide rent control. 

Others would affect CRE indirectly but could still substantially impact the industry, Rosen said. He pointed to the wealth tax proposed by Sen. Elizabeth Warren (D-MA).

Each proposal comes at a time of impressive growth for the national economy and CRE, Rosen made clear. Unemployment as of last month basically held firm at 3.6% — near a five-decade low — with wages growing a respectable 3%. Fundamentals for nearly every property type remain very strong, especially for industrial and multifamily assets.  

"Cap rates are at an all-time low for all property types except for retail, and our view is they won't go up much," Rosen said.

NAR Chief Economist Lawrence Yun, Rosen Consulting Group Chairman Ken Rosen, Panoramic Interests President and owner Patrick Kennedy and NAR Commercial Economic Issues and Trends Forum Vice Chair Mike Vachani

Similarly, the national vacancy rates for multifamily properties of five or more units sits at 7.9% (and 3.9% for the "investment grade vacancy rate"), representing a 50-year low, according to Rosen. 

Likewise, industrial assets across the country continue to benefit from e-commerce's voracious need for distribution centers. Total returns for industrial assets are pacing at 13.6% this year, over twice the mark of the next closest property type (office at 6.5%), according to National Council of Real Estate Investment Fiduciaries data. 

Yet even if the more progressive Democratic presidential hopefuls don't find success implementing aforementioned proposals, the threat posed by the ongoing U.S.-China trade war worries both Rosen and the other economist on the panel, National Association of Realtors Chief Economist Lawrence Yun.

Though Yun puts the chances of a recession in the next 18 months as less likely than does Rosen, he agrees with Rosen about the importance of the world's two largest economies reaching a resolution sooner rather than later, both for their commerce and other trading partners.

For instance, Germany has already entered a recession, both Rosen and Yun point out, and the country's economic slowdown can largely be traced to the economic damage President Donald Trump's tariffs have inflicted on China, a big customer of Germany's.

"If other countries go down, it's impossible for America to grow," Yun said.

Rosen Consulting Group Chairman Ken Rosen, vice chair of the forum Mike Vachani and NAR Chief Economist Lawrence Yun

As a professor emeritus and chairman of UC Berkeley's Fisher Center for Real Estate and Urban Economics, Rosen is close to the potential tech bubble that he said is another major threat to commercial real estate and the U.S. economy in the next two years.

"We are going to see a deflation in that sector," Rosen said. "It may not happen in 2020 or 2021, but it will definitely happen. And it will be a trigger. It's a very important sector of the economy."

"We're in the biggest tech bubble we've ever seen," Rosen said.

Companies like Bird, DoorDash, WeWork and Uber have gained substantial market shares — and office space — without having turned a profit, Rosen points out. The national office market has been buoyed by these tech companies and others like them, which poses a risk to the national economy and office market, particularly in tech-reliant cities like San Francisco. 

Given the likelihood of a downturn in the next 24 months, Rosen provided one main piece of advice: Lock in income from creditworthy tenants as quickly as possible.

"If we get a recession coming, which I think is very possible in the next three years, really focus on the leasing and getting that income and having a credit tenant," Rosen said. "In the San Francisco area, we've got tenants who might be suspect, the WeWorks, the Birds. We have to say that they're somewhat suspect."