Recession Fears Squashing Deals: Bisnow Survey
Investors across the country are clamoring for industrial properties right now, especially those with solid tenants in place and proximity to major roads and population centers. So why did the planned trade of a fully leased, interstate-adjacent industrial building in New Jersey fall apart?
Interest rates, according to the developer trying to sell the property.
"We were doing the sale of a large, fully leased industrial property, with immediate access to an Interstate highway, pursuant to a signed letter of intent, but the purchaser backed out because of the Fed’s interest rate increases," New Jersey-based Mountain Development Corp. Chairman Robert Lieb said as part of Bisnow’s Recession 2022 survey.
The survey ran from July 31 to Aug. 9 and took the temperature of 314 respondents in the commercial real estate industry across the country, finding that while there is still a fair amount of confidence in the market, real estate professionals are apprehensive about the next few months, both economically and politically.
A majority of respondents — 65.5% — believe the U.S. economy is already in a recession, and 57.3% have put a recent project or deal on hold because of escalating costs or increased market uncertainty.
Joel & Granot Commercial Real Estate principal Alan Joel is among them. His Atlanta-based company had two commercial properties for sale, one for about $8M, the other for about $9M.
"We had both on the market for sale and had to pull them," he said.
New caution is emerging, with 49.4% of respondents saying that their companies will be neither net buyers nor sellers of property in the next 12 months. In other words, they intend to hold their positions.
On the other hand, some see the economic conditions as an opportunity to find deals — some 37.9% said they plan to be net buyers of commercial properties over the next year, while 12.6% said they plan to be net sellers.
As for leasing, survey respondents expected a recession to take a further toll on the battered office sector. Some 58.1% of respondents said that companies will reduce their overall office footprint to save on costs, or offer more remote work, in the current climate.
Only about one-fifth of respondents said that more workers will be called back or will want to return to corporate headquarters.
Overall, the survey found that the impact of a recession on the commercial real estate industry would be mixed, negatively impacting some parts of the industry while others stand up well in a broader downturn.
A sliver of respondents — 3.2% — think that the fundamentals in the property market will perform well even if the broader economy slumps significantly. And as with everything real estate-related, geography matters.
With new government investment in advanced technology sectors, there will be growth in the semiconductor, data center, aerospace, bioscience and healthcare sectors, Colorado-based U.S. Engineering Construction's Director of Business Development Caryn Becker told Bisnow.
She cited metro Denver as an example of a major CRE market poised to weather a recession.
"These industries are often clustered in specific areas of the country, with the exception of healthcare, which is needed everywhere as our population ages," Becker said. "The Denver metro is diversified, and will attract various high-tech industries."
One open-ended survey question — “What would give you confidence to get going again?” — evoked a wide variety of responses.
Some responses were political, hoping for "new leadership in Washington" or more specifically, "Republicans gaining control of the House and Senate."
"We need to find a pathway towards sound fiscal and monetary policy, cut spending, look to reduce tax and regulatory burden, and encourage on-shoring and near-shoring of our manufacturing base," Berger Commercial Realty/CORFAC International Senior Vice President Keith Graves said.
"We also need to foster the domestic energy sector, while simultaneously expanding the electric and non-fossil fuel technologies — those do not have to be mutually exclusive," Graves said.
Other respondents cited purely economic shifts as balms for the industry, such as interest rate stability, lower fuel prices, the righting of the international supply chain and increased consumer confidence.
Still others mentioned improvements in real estate itself, such as lower, or at least stable, lease rates, lower construction costs and "more realistic pricing."