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In Their Own Words: What The Next Economic Downturn Will Mean For Commercial Real Estate

What will the next downturn look like for CRE and what should the industry do about it?

Bisnow asked that question of more than two dozen commercial real estate C-suite execs around the globe, and nearly across the board, they said they aren’t worried about an economic slowdown hurting the property industry.


That isn’t to say they don’t think a downturn is coming in the next few years — most do, but think the CRE industry is healthy enough to withstand it.

The execs, mostly CEOs or presidents of development, brokerage or capital markets firms, shared their advice on staying healthy if the general economy drops. Diversification is the main thread — most suggested building up a portfolio that spans geographies and property types (including some specialty sectors like student housing or healthcare real estate) to insulate against specific pain points. Focusing on Class-A was another common response; many of the execs think Class-B and C product may suffer when the economy goes south.

And of course, there are some contrarians in the mix, ones that have stark warnings about what may be coming soon.

Here is what some of the smartest minds in CRE have to say about shoring up against the next downturn.

Walker & Dunlop CEO Willy Walker | Bethesda, Maryland

Walker & Dunlop CEO Willy Walker

I think the economy continues to expand quite nicely over the next several years, with the one large caveat that a legitimate move to impeach President Donald Trump, or a contested 2020 presidential election, could cause the markets to unravel.

If we continue forward at current leasing rates, occupancy rates and debt levels, CRE will not be a contributing factor to the downturn. But once a downturn begins, I think there will be several ramifications.  

First and foremost, I think that WeWork blows up. The demand for [shared workspaces] will disappear, and WeWork leases will be essentially worthless to landlords. WeWork has done a masterful job at signing leases at the serial LLC level, and not the parent level, so that when times get hard, they can walk [away] from their commitments. This will rock owners of office buildings who have significant square footage leased to WeWork, and will also impact lenders who are underwriting WeWork leases as long-term, guaranteed revenue, when it is not.

Second, I’m hard-pressed to think that big-box retail could get any worse, so I doubt we see a recession significantly impact that space. But strip malls and local retail that have done quite well will be impacted by an economic slowdown. People still buy food, get their clothes dry cleaned and get their nails done (maybe not as often) during a downturn, so local retail should hold OK, but there will be pain.  

I think the euphoria over industrial will slow in a downturn. Amazon will still continue to digitize the economy, but a slowdown will invariably impact retail and the drive by new e-commerce companies to disrupt mainstream retail and business. Cap rates are scary low in industrial, and while there still seems to be an insatiable appetite for new industrial space, that will get pinched.  

Hospitality is “first in, first out,” so any downturn will immediately hit revenue per available room and hospitality numbers. But from the lending we are doing in hospitality, everyone feels that this cycle is “long in the tooth,” so nobody is getting out over their skis in development or financing of new hospitality. Generally, the large multinational operators, such as Hilton and Marriott, are focused on emerging markets for growth, and that is keeping the general development of hospitality at a sustainable clip.

Multifamily has clearly been the best commercial real estate asset class to be in, and given its countercyclical nature of affordability and access to capital (Fannie Mae/Freddie Mac/HUD), it will do fine in a down economy.  

Finally, from an interest rate standpoint, it is really hard to see rates staying where they are today for multiple years to come. Most of the debt sitting on commercial real estate today has a 3 or 4 at the beginning of the rate. If rates run in 2021 or 2022 (I’m smart enough not to try to tell you why they will run), there could be some significant issues rolling debt on commercial real estate properties in 2024 and 2025 at 5, 6 and possibly 7% rates.


Bei Capital CEO Collin Lau | Hong Kong

The current CRE market is buoyed by unprecedented quantitative easing and monetary policy. The escalating fiscal deficits of a number of OECD [Organisation for Economic Co-operation and Development] countries are reaching unsustainable limits. Economic nationalism and geopolitical tensions are slowing cross-border capital flows from net-saving countries to consumption-oriented economies.

The next downturn in CRE will be catalyzed initially by a stagnant economy and low growth followed by multiple years of mild-to-escalating recession, credit re-rating and demand for higher risk premiums by capital providers.

Income growth will slow or go negative in the medium term, cap-rate compression will cease and chasing simple market beta will be impossible. We will also witness aging demographics and subtle changes of consumption baskets and lifestyle that revolutionize the format of office and retail.  

Industry must adapt by reducing exposure to very conventional, plain-vanilla office and retail and investing in specialty CRE that addresses changing lifestyle needs such as technology, healthcare and education. Operational teams will require new expertise. To avoid new operational initiatives that add value to the CRE is probably riskier than investing in operationally intensive assets.

While keeping income and capital gain taxes are fair, the industry should also start to lobby for the reduction of withholding and other indirect taxes that inhibit international capital flows. It takes time to develop consensus among politicians on how economics work, and by the time they need the policy, hopefully it will not be too late.


CBRE CEO of the New York Tri-State Region Mary Ann Tighe | New York City

CBRE Tri-State CEO Mary Ann Tighe

In most ways, the New York City office market is well-positioned for the next downturn. With public market players and the “old families” representing the largest share of the commercial inventory, leverage has been kept under control. The great imponderable is what happens to coworking in the first downturn this industry segment will experience. The expectation is that there will be a sorting out among the firms, that the concept will survive the test but a number of companies will not. How this ripples through the pro formas of the various properties that house these firms will also be noteworthy. And, as always, the commercial market will weather the downturn but be recalibrated, with lessons learned shaping the next era of development, investment and leasing.


Savills CEO Mark Ridley | London

The biggest medium-term risk is probably a global slowdown that would be stimulated by multiple factors rather than one coordinated event as we saw in the Global Financial Crisis. Central banks have limited tools at their disposal to combat such a slowdown, so the feed-through into the property markets could happen fairly quickly. Looking around the world I am comfortable that the real estate sector is well-positioned to weather such a slowdown, with low levels of borrowing, restrained levels of speculative development and an increasing investor focus on income.


Transwestern Commercial Services President Tom Lawyer | Houston

I’m bullish on where the commercial real estate industry is right now and how well the industry seems to be prepared for a downturn. Our economy is growing and diversified, but most experts agree that we will likely have a downturn in 2020 or 2021. The question is what the catalyst will be. If we have a downturn and it’s created by something outside our borders — be that trade, geopolitics or any number of other potential concerns — commercial real estate will slow down, but I think we’ll come out of it fairly quickly like we did in 2009. Commercial real estate fundamentals across most of the U.S. are sound, and new supply has been relatively restrained. U.S. companies are in good shape, and there is not a significant overcommitment on future space needs by tenants. Outside of a few markets, there is no large demand/supply imbalance. Even with the large volume of apartments that have been developed in this cycle, most markets are performing well.

While short-term interest rates were on the rise in 2018 from their historically low levels, the Fed now appears to be moving away from any aggressive upward movement for the foreseeable future, which is a good sign for real estate. Lastly, the capital structure and leverage levels are much more conservative than they were going into the last downturn. I’m optimistic and encourage continued, well-thought-out investment and development strategies, even as we are operating at the potential tail end of a long-running cycle. As we consider the business plans for existing assets and underwrite new acquisition and development opportunities, we should recognize the likelihood of a downturn during the ownership period and explore development, leasing, asset management and disposition strategies that ensure sustainability and performance during a more challenging environment.


Dranoff Properties founder and CEO Carl Dranoff | Philadelphia

I think the next downturn could be healthy for our industry, because we are at absolute capacity at trying to build buildings, train workers, educate talent and recruit talent. … Yes, retail has been dinged and office is changing, but adjustments will be made. … But the ability to find carpenters, engineers and the material supply to build a house, that’s what worries me. So I believe we need a pause, and that a downturn won’t require so much of an adjustment.

The last downturn was severe because of a lack of liquidity in the finance markets, not because of a supply imbalance. It was very disruptive, but I don’t see that; I see a normal downturn where the laws of supply and demand take over, and we have more of a balance than we have right now.


Lupoli Cos. CEO Sal Lupoli | Boston

Lupoli Cos. CEO and President Sal Lupoli

The commercial real estate market is going to shift in the next 18 months, and we will see more of a decrease in strong inventory and quality deals. While major markets like Boston won’t feel the effects of the downturn, what I’m really focused on as the largest developer in a peripheral market like the Merrimack Valley [an area north of Boston straddling the Massachusetts and New Hampshire border] is diversification and innovation.

My early focus relied heavily on office space, but we are now expanding our development portfolio to include more housing, retail, technology and healthcare. And even within those markets, it’s critical to stay innovative. It’s not just about a home for a resident or a brick-and-mortar retail space, but the overall experience and how we can make [it] better. By creating unique opportunities like in our augmented reality Experience Center in Lawrence, Massachusetts, we’re finding interactive ways for our residents and tenants to have more control in their decision-making. It is also important to ensure that anyone at our properties understands we’re not just a developer, but an integral part of every community, heavily involved with local leadership and organizations.


Douglas Wilson Cos. CEO Douglas Wilson | San Diego

The nation is at the tail end of the longest economic recovery we’ve had since World War II and it’s naive to think there’s not going to be a correction that will impact real estate.

Although I don’t think it will be of the magnitude experienced 10 years ago, it’s unwise to think it won't happen.

We have considerable authority to speak on this topic because we’ve built a business built around navigating cycles. So my advice is to be aware, cautious, prudent and prepared. Avoid over-leverage and tighten up your underwriting standards.


Meridian CEO John Pollock | San Ramon, California

Focus on the fundamentals and stick to your knitting — this is not the time to relax your standards or venture into a new asset class. From our perspective in both the healthcare real estate in the western U.S. and the general office markets in the San Francisco Bay Area particularly, there is an abundance of capital and operators chasing deals that are willing to push the envelope. When a correction occurs, those owners are going to feel the pinch. When their projects fail to meet pro forma, absorption schedules, construction schedule, lease rates, operating expenses, capital expenditures, etc., their third-party equity providers are going to become increasingly involved and then their lenders will begin squeezing them.

This reminds me of the old real estate prayer, “God, give me one more downturn, and I promise to do it right this time!” There is a silver lining: Those who stick to their knitting, focus on fundamentals and save some capital can find tremendous buying opportunities when the correction occurs.


Henry S. Miller CEO Greg Miller | Dallas

We are late in the cycle and expect a slowdown in the overall economy later this year. However, we don’t expect it to be a full-blown recession but rather a slowing of growth. Commercial real estate cycles tend to lag the general economy so we likely won’t feel the effect in the commercial real estate market until much later. In addition, the fundamentals of the commercial real estate market are stronger now than in previous times near the end of a cycle. Due to the pain inflicted by the Great Recession, financial underwriting has been more diligent in general so the market is not overbuilt. Accordingly, we don’t expect the coming slowdown to have a terribly severe effect on the commercial real estate market.


Eastdil Secured CEO Roy March | New York City

The previous obsession was, what will happen to real estate values when rates go up? Well, that happened and the impact was very limited to nonexistent. Our view was always that rates going up was not a harbinger of values going down. What brings a real estate cycle to an end? It is either oversupply, over-leverage or a general recession. In most major markets around the world supply and demand are balanced, and leverage points are 10-15% lower than in the last peak, around 60% compared to 70-75%. A lot of people are predicting a mild recession, but we don’t subscribe to that theory, it will just be a period of low rates and slow and steady growth.

We call it the CIO conundrum. There are still $9 trillion of sovereign bonds out there that yield 0% or are in negative territory, and big global pension funds and institutions are looking for a 6-7% return. Ten-year Treasuries are yielding 2.6% and AAA CMBS is yielding 3.5%, so how do you get to 6-7% without taking undue risk? We think the answer is classic core real estate in the major cities around the world. You also have a transition in leadership in a lot of these pension and sovereign wealth funds — increasingly the CEOs and CIOs are coming from the real estate or alternatives sector, so real estate is becoming more of an institutional asset class, and these funds will be allocating more to real estate and real assets as they understand it and need it to help find returns.

In this kind of environment investors should be looking at core, core-plus and value-add real estate in major markets. You can get a 10-year IRR of 6-7% and then if you add conservative leverage of maybe 40-50%, you are looking at an 8-10% return with a bit of a hedge against inflation, and that is exactly what people want today.

RXR Realty CEO Scott Rechler | New York City

RXR Realty Chairman and CEO Scott Rechler

I believe that the next commercial real estate downturn is going to be driven more by structural shifts than just a shift in economic cycles. The way that people live, work, play and stay has changed, but the real estate industry as a whole has been slow to adapt to our customers’ evolving preferences. When the economy next slows, I am confident that the performance of properties that have adjusted to these trends will outperform those whose owners have rested on their laurels and were previously buoyed by a stronger economy. These owners will then realize that many of these properties are actually competitively obsolete without material capital investment. As Warren Buffett has said, only when the tide goes out, do you discover who has been swimming naked. Similarly, the next downturn will be marked by a big gap between those properties that are positioned for the 21st century and those that are not, with the downturn likely to impact “have” and “have not” properties in starkly different ways.


Marcus & Millichap First Vice President Michael Fasano | Atlanta

Economists anticipate the next downturn will be much milder than the last recession, but investors still need to stay ahead of evolving market trends by positioning for the next cycle. Continued economic momentum and elevated liquidity through 2019 will sustain opportunities for both sellers and buyers, making this an opportune time to consider investment strategies and portfolio composition. Undoubtedly, new challenges will emerge, motivating owners to transition to a more balanced portfolio that is diversified across geographical location and property type, pruning assets that no longer match long-term investment goals.

Portfolios that diversify geographically are better protected against natural disasters and localized economic shocks. Metros that are heavily reliant on a single employer, industry or business sector create disproportionate risk for property owners, making it imperative that investors mitigate cyclical risk by acquiring properties in dynamically different metros. Diversification across multiple property types helps mitigate risk as well, minimizing exposure to specific cycles related to individual asset types. This also provides investors with greater flexibility when setting strategies, with the potential to boost portfolio yield by shifting to property types that are still on the upswing. While signs of an impending economic downturn have yet to appear, now is an opportune time to set investment strategies for the next growth cycle.  


O’Connor Capital Partners President Joel Bayer | New York City

In the past two major real estate downturns (in 1990 and 2008) we saw across-the-board decreases in valuations and transaction volume in all property types. While both periods were triggered by different causes, each was characterized by a lack of liquidity created by lack of adequate financing sources and low interest by equity investors to fund new capital.   

We think the next downturn will be different and that the “A” or high-quality assets will only experience a small impact. However, we believe that “B” or lower-quality properties will have a dramatic negative performance in the next downturn and become “C” or lower quality assets. Thus, the change or decrease in value in these assets will be likely much quicker than has happened in the past.   

Industry participants should align themselves immediately with experienced real estate managers. These professionals will assist the investors in moving capital into the right assets to own long term and out of the properties that have a higher potential for negative performance in a downturn. We strongly recommend that investors proactively do this now.  


Mag Mile Capital Executive Vice President of Capital Markets Rob Bernstein | Chicago

While cap rates continue to creep up across most asset classes in many markets throughout the country, the next real estate downturn should be milder and less severe than the previous crisis.

We expect to see continued discipline on the lending side, which will help pare loan losses.

We're also starting to see many equity players jump into the debt space as they see better risk-adjusted returns at levels they're more comfortable with, should they end up owning the asset.

Lending on hospitality/retail should continue to get more stringent, while the multifamily space and self-storage sector will continue to be hot asset classes and competitively bid on both the equity side as well as the debt side.


Columbia Property Trust CEO Nelson Mills | New York City

We’ve enjoyed an extended run of economic growth and, while it’s true that markets invariably cycle, we’re not seeing indicators of a significant downturn in the near term. To mitigate cycle risk, we maintain a modestly levered balance sheet and adhere to the same strategy that has successfully guided us to date — investing for the long term in high-quality properties in liquid gateway markets, and positioning our properties to attract the very best tenants. While providing differentiated quality space always pays off, it’s even more crucial for competing in a down cycle.


Compass Construction President Frank Stauff | Seattle

Compass Construction President Frank Stauff

We don’t see a downturn like 2008 coming. Job growth is still strong, coupled with a strong demand for affordable housing, especially around transit centers. With multifamily housing being the most affordable way to address the region’s affordability crisis, low-income and workforce housing will serve to cushion the falloff from market-rate housing demand. The market will eventually slow for sure, but we believe there will continue to be a demand. At Compass we are being very strategic with our expenses, aggressively filling our backlog and expanding our role into ancillary markets.


KBS CEO Chuck Schreiber | Newport Beach, California

The risk that is out there [is] for projects that are not stabilized and are in markets that are not experiencing growth in occupancy and tenant demand. Investors in those markets are looking for a recovery that may not happen. At KBS, our portfolio totals 37M SF and approximately $11.BM in value … primarily high-quality Class-A, multi-tenant office properties in markets that have realized growth in tenant demand and occupancy over the last five years. We have stable companies as tenants and during the last six months we are repeatedly renegotiating lease extensions with major users for leases up to the end of 2020. We do not anticipate a downturn or decline in these markets through 2020.


Ackerman & Co. President Kris Miller | Atlanta

Economic cycles come and go; at some point, the current expansion will end. Right now, Atlanta commercial real estate is in a particularly good position to survive any economic correction that may come our way. The demand for all commercial real estate product types in Atlanta is strong. For the most part, new development has been limited, causing supply to grow more slowly than demand. This has resulted in historically low vacancy rates in nearly every product type and every submarket. These conditions lead us to believe that the next correction will be fairly shallow and quick.

To be ready for a potential change in the economy, Ackerman & Co. is doing a few things.

First, we are committed to staying on the field and continuing to make new investments in commercial real estate.

Second, we are focused in underwriting the specifics of each deal rather than broad market trends.

Finally, we are using more stable capital structures that will be best able to survive any potential downturn.


The Mount Vernon Co. founder and Chairman Bruce Percelay | Boston

It is impossible to predict exactly when a downturn will happen and what will trigger it. I personally feel our biggest risk right now is not economic but political. We are very fortunate in Boston and Massachusetts to have clear-headed and supportive political leadership and, should there be a dramatic turn to the left, it could have a chilling effect on our market.


Colliers International Denver President Brad Calbert | Denver

As the Denver Metropolitan Area transitions from a time of prosperity into a more normalized market, the commercial real estate business community does not expect a dramatic correction. The challenges in obtaining property entitlements will restrict excessive supply from being added to the existing commercial real estate inventory. Supply constraints combined with rapidly escalating construction costs will keep the market in or close to equilibrium. The commercial real estate community does not feel a real estate recession is imminent.


Rosewood Property Co. President Rick Perdue | Dallas

A lot of smart people have called for, and written about, a recession “next year” for the last four or five years. Will there be a recession in the future? Of course. The tough part, though, is predicting exactly when, and I will readily admit I don’t know. When we do enter a recession, I expect the Dallas-Fort Worth area to be the last in and the first out, just like last time. During the last recession, as well as the oil price collapse of 2015-16, DFW proved to be a truly diverse economy and continues to lead the country in job creation ever since. We learned from the last downturn that the groups that were not over-leveraged or overextended survived, and many of them even thrived. This is my same advice for today and any future recessions — don’t overextend and don’t over-lever.


Avison Young CEO Mark Rose | Toronto

Avison Young CEO Mark Rose

The next downturn will be driven by the impact of an economic recession or rising interest rates. It will result in a much-needed pricing correction. Normalization of interest rates was the natural move from “free money” and needs to make its way through to cap rates and yields. Repositioning portfolios using modest leverage and using “dry powder” to take advantage of the correction is the ideal strategy. Historic low cap rates cannot last forever.


Strategy+Style Marketing Group founding partner Karen Fluharty | Chicago

The stronger the destination, the more resilient the asset.

As the “buy anywhere, get everywhere” shift maintains its momentum in the retail industry and less need for traditional, structured workplaces grows in the office sector, CRE faces increasing consolidation where technology solutions, such as AI, location-based data and other emerging data-set mining tools will become paramount.

For retail, consolidation not only means launching property-wide re-imagination strategies related to destination creation, but effectively altering corresponding leasing strategies to attract unique and authentic food and beverage, seasonal temp and innovative pop-up store concepts. For office, change means the development and build-out, adoption of the flexible leasing term and aggressive marketing of collaborative office and/or short-term space.

Although frequently defined as a negative for any industry, change and consolidation may be considered an enormous opportunity for CRE provided a meaningful investment in technology solutions that mine data to forecast space-type needs, coupled by changes to fundamental business practices are adopted, and adopted now. Given CRE studies continue to prove that 1) “clicks need bricks” maintaining the consumer’s desire to touch and feel and 2) back-office space is essential for planning, logistics and services, the key to surviving the consolidation downturn must include a philosophical shift from a “market first” to “customer first” decision-making approach.