‘I Would Not Be A CRE Investor’ Right Now, Says Moody’s Chief Economist
The low interest rate environment could drive steady gains for the American economy, but the chief economist at Moody’s Analytics thinks commercial real estate is going to miss out on all the growth.
Mark Zandi, who directs the economic research arm of Moody’s Corp., said that he “would not be a CRE investor” with a typical four- to five-year hold, even if the Federal Reserve holds interest rates very low and the government takes a strong, consistent move toward stimulus.
“Broadly speaking, demand for commercial real estate is going to be under significant pressure,” Zandi said on Wednesday’s Walker & Dunlop Weekly Webcast. “Hotels and retail will continue to struggle. Working from home is a real phenomenon. Industrial looks better, but even there, it matters if you’re a gateway city or not, given the disruptions in global trade.”
If Zandi’s predictions hold true, it would pour cold water on the dreams of many investors who are hoping to pick up real estate deals at a discount and ride the recovery back up, as many investment firms did during the last recession. His predictions would also temper more modest hopes for a quick return to normalcy for the commercial real estate industry.
While most investors remember how low the interest rates were following the great financial crisis, Zandi said, they tend to overlook how high inflation rates were in the same period. With the federal reserve eyeing the possibility of running inflation at rates of 2.5% or even higher, yields on investments like CRE could take a hit.
Zandi anticipated that if and when a vaccine or therapeutic treatment for the coronavirus emerges and economic growth begins to pick back up, American markets will run up against the immense amounts of sovereign debt, as foreign investors begin to wonder whether they will get paid back. That inflection point, he said, will be a difficult time for commercial real estate.
Yet, real estate is not without its bright points. Zandi admitted that the single-family housing market has come roaring back much faster than he expected it to, and said that, were he to choose a single vertical to invest in within the world of CRE, he would choose single-family workforce housing, given the number of low-income Americans who are looking for larger places to move outside of urban centers.
But even single-family housing has some dark clouds on the horizon, most notably student loan debt, which now tops $1.6 trillion. Zandi predicted in 2014 that student loan debt would be the cause of the next recession, and while the coronavirus stymied that forecast, he still thinks debt is a large threat to economic growth. The median age of a first-time homebuyer has held largely steady around 33 for many years, Zandi said, but that number is likely to tick up without a move to address student debt.
“There’s really clear evidence that student loan debt is an impediment to business formation,” Zandi said. “Entrepreneurship has been depressed in the last years. It also affects the ability for graduates to start families, which is key to economic growth. This is a very serious issue and it has to be at the top of the political agenda for whoever is in the White House come 2021.”
Zandi and Walker & Dunlop CEO Willy Walker also discussed the government’s role in leading the country out of recessions. While Zandi was complimentary of the way the Federal Reserve and the Trump Administration have learned from the “playbook” from the 2008 recession, he worried that political concerns — and the timing of the election itself — could hobble the recovery once again.
“When the [financial crisis] set in, in August and September of 2008, the administration was hollowing out,” Zandi said. “You could walk down the halls of the Treasury Department and see no one. There was no horsepower to see the country through.”
With an election looming, and aid talks possibly at a standstill until January, poor timing could mean no stimulus funds during what Zandi described as a critical impasse for the recovery from the coronavirus. Tuesday’s jobs report showed growth slowing down, and without more government-backed funding to prop up the economy, Zandi thinks those numbers could quickly turn negative. He cited weaknesses in the economy that long predate the coronavirus.
“This narrative that the economy was doing great is just wrong,” Zandi said. “You had parts of the economy that were already struggling: manufacturing, transportation, agriculture. This time last year, [President Trump] called a truce on the trade war. If he had followed through on that, 2020 could have been a year of recession, with or without the pandemic.”
Zandi was critical overall of the Trump Administration’s economic policies, but said that the economic effects of the coming election hinge less on whether Trump or former Vice President Joe Biden captures the presidency, but whether or not the Democrats “sweep” the presidency and the two houses of Congress. If Congress remains split, it will likely mean small changes to the tax code, while a fully Democratic government could mean walking back the 2017 Tax Cuts and Jobs Act, a major benefit to corporate interests and commercial real estate in particular.
But while the prospects of a Biden presidency could send equity markets tumbling in the short term, Zandi said, the four-year forecast for both a Biden and Trump presidency places the stock markets essentially back at its current level.
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This feature was produced in collaboration between the Bisnow Branded Content Studio and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.