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Soft Landing Or Deep Recession? Whatever Is On The Horizon Isn’t Like Any Other Downturn

The Federal Reserve raised interest rates by another 75 basis points Wednesday as it continues to compete on two fronts: combating inflation and trying to prevent a painful recession

Historically, the central bank’s attempts to thread the needle for the U.S. economy haven’t gone well. More than two-thirds of the country's post-World War II recessions have been caused by the Fed raising interest rates too quickly, University of Chicago economics professor Austan Goolsbee told NPR last week. 

There is a slim margin for error and no consensus on where the economy is headed: Economists pegged the odds of a recession next year at about 50% in a July Bloomberg survey, up from 30% in June.

Rising interest rates and fears of a recession are already impacting commercial real estate, with major lenders becoming more conservative and some developers putting planned projects on hold. As industry players prepare for the coming slowdown, they are finding it difficult to pinpoint a useful historical analogy, but the closest comparison may come from the start of this century.


“In terms of the size of economic correction that we could possibly see, it could be something comparable to the dot-com bust where, at the national level, actually there wasn't very much of a change in economic growth, but because of all the other elements that were at play … we were in a proper recession,” Oxford Economics Associate Director Christopher Babatope told Bisnow, adding that he wasn't convinced a recession was on the way.

“But that’s pretty much the only element that’s really comparable in the last 50 or 60 years," he said. 

Experts said they don’t expect anything nearly as severe as the pain CRE felt during the Great Recession. And given the choice between a recession that looks like the dot-com bust or one more like the Great Financial Crisis, property pros would be wise to select the option more akin to the early 2000s downturn.

Commercial property prices dropped 3.9% in the last quarter of 2001, according to a transaction-based index from the Massachusetts Institute of Technology. By contrast, the same index declined 18.1% in Q2 2009 and was down 39% from its mid-2007 peak. 

From a broader economic perspective, the impact was much milder in 2001. The recession that followed the pop of the dot-com bubble lasted eight months and consisted of a gross domestic product dip of 0.62% and an unemployment peak of 5.5% in November 2001. 

During the 18-month Great Recession, GDP fell 4.3% and unemployment reached 10% in October 2009, according to the Bureau of Labor Statistics

One reason things may not take such a sharp turn for real estate is that the industry learned a thing or two from the Great Recession.

“One big lesson that the industry really learned was, let's go back to what we do well, which is looking after buildings and asset managing buildings well and driving value through the bricks-and-mortar,” said Andrea Carpenter, Diversity Talks Real Estate co-founder and director.

With some of those lessons not yet forgotten, an economic downturn might be shallow and brief, especially for the property industry.

“It’s probably more akin to something like the dot-com bubble, where there were pockets of trouble … but by and large, it wasn’t a terrible downturn and it wasn’t awful for commercial real estate,” JLL Chief Economist Ryan Severino said. 

JLL Chief Economist Ryan Severino

The uncertain environment, including interest rate hikes and cost increases, has some developers taking a second look at their business plans.

“We have about eight or nine different projects that we were supposed to launch this year, and we've delayed some and we put some on the sidelines and [we are] proceeding with others,” Allen Morris Co. Chairman and CEO Allen Morris said, adding that only one of his company’s projects, a resort hotel, has been truly sidelined. 

“The interest rates are a big factor, but the construction costs have risen dramatically higher percentage-wise than the interest rates have,” the Florida-based developer said.

Whatever form a downturn takes, buyers and developers will still have access to capital, Colliers National Director of Capital Markets Research Aaron Jodka said. 

“We're hearing signs of additional capital being required in transactions, so a higher equity contribution, which is something that the market can adjust to, can adapt to,” he said. “I don't see anything here that's fundamentally waving white flags or red flags of real concern.”

The capital spigot isn’t going to stop flowing completely, but a slowdown could put a kink in the hose. The Mortgage Bankers Association, citing interest rates and supply chain disruptions, last week predicted that commercial mortgage lending would fall to $733B this year, down 18% from $891B in 2021. 

JPMorgan Chase CEO Jamie Dimon has been among the biggest names sounding the alarm about where the economy is headed, in June telling a group of analysts and investors at a financial conference that a “hurricane is right out there, down the road, coming our way,” CNBC reported

JPMorgan Chase CEO Jamie Dimon

After signaling that JPMorgan, the biggest U.S. bank with $2.65T in domestic assets, would be conservative with its balance sheet, Dimon said during the company’s Q2 earnings call on July 14 that "capricious, arbitrary" regulations over how much capital banks must keep on hand will drive down lending.

JLL’s Severino said a sky-is-falling attitude can have unintended consequences.

“At some point, it could become a self-fulfilling prophecy,” he said. “If you just keep telling people over and over and over again how terrible things are — a 'repent, the end is nigh' sort of thing — then it does increase the probability that they start to adjust their behaviors and bring about that very eventuality.”

Even if the more pessimistic view comes to fruition, Morris said he sees higher interest rates as less of a problem for commercial developers than for single-family homebuilders, who in very short order have found themselves with too much supply and not enough demand

A downturn or full-blown recession would hit different sectors and regions differently. In many cases, experts told Bisnow, the rich would get richer while the poor get poorer.

“I think industrial and apartments can probably weather this pretty well,” Severino said. “Now, that's not to say that they're immune to a slowdown. Certainly, if there is a slowdown or if we tipped over into recession, neither of them would come through this completely unscathed. But I think those are both property types that are characterized by incredibly strong demand relative to supply that's out there.”

Geopolitical issues in Eastern Europe and unresolved Brexit issues poise the UK property sector to struggle more than U.S. real estate, Babatope said. With the energy price cap — the UK Office of Gas and Electricity Markets’ maximum price a supplier can charge customers — expected to rise by nearly 60% in October, UK inflation hasn’t summited yet.

“Our expectation is that we'll see inflation peak around 12.1% sometime in the autumn,” Babatope said.

There is little doubt an economic slowdown is coming on both sides of the Atlantic, adding to the hurdles that the industry must cross. Carpenter said responses to climate changedecarbonization, and challenges facing the retail and office sectors are problems that need tackling even amid a downturn.

But, as ever, real estate is the domain of the optimist. 

“All those things are difficult,” Carpenter said. “But I also think they're an opportunity at this time, to solve them and kind of come back more resilient, both from an environmental and social point of view, for property to think more holistically about its impact and work more towards social returns as well as environmental returns.”

UPDATE, JULY 27, 2:15 P.M. ET: The Federal Reserve raised its benchmark interest rate by 75 basis points Wednesday, a move that had been expected earlier in the week. This story has been updated.