The question is no longer, “Is a recession imminent?” By definition, negative GDP for two consecutive quarters, we are in a recession.
NAI Cascade brokers Walt Ramage, Jeff Reed, Chuck Brazer, Katy Haines, and Lynn Coker were in the industry in the Great Recession of 2008 so they sat down to discuss how this one could be different and how the commercial real estate industry will fare.
As far as origin stories go, this recession comes from very different beginnings. Gone are the days of unsecured debt, and subprime lending leading to massive foreclosures and bank bailouts. “There are totally different drivers,” said Chuck. “This was the economy growing too quickly after COVID. The first was corporate greed and easy money.”
The next downturn is expected to be more concentrated and shorter given that most in banking and real estate have been preparing for it essentially since the last one ended. The period of economic growth is now the longest in US history and that has given companies time to plan and raise capital to take advantage of a market correction, SVN Advisors predicted in late 2019.
This was, of course, before the US knew about Coronavirus and the forced recession when few were leaving their homes to spend money. What followed was a government backed correction, which all five brokers agree was an over-correction. The multiple stimulus packages and sustained low interest rates butted up against a stifled supply chain resulting in extreme demand with very little supply. As prices soar across the board, it appears that the pendulum has once again swung too far.
Another key difference is that employment numbers are solid. June 2022 reported a 3.6% unemployment rate as compared to 3.5% in February 2020, pre-pandemic, and the unfilled job rate is high. There are 11 million vacant jobs, 4 million more than in the height of the last economic expansion, according to the Wall Street Journal, calling this a “jobful downturn.”
The brokers all suspect that Central Oregon may be in a better position heading into a recession than larger cities. Though we have seen the residential market slow, NAI brokers believe that the demand here will not wane the way it has in larger cities. “There are external factors that make it more appealing than other markets and create alternative growth,” said Chuck. When asked where those people were in the previous recession, Jeff posited, “They still liked living in the big city. The pandemic changed all of that.” Jeff backs this up, citing several large companies and their workers leaving major metropolitan areas including Boeing, Citadel Hedge Fund and CAT’s exit from Chicago; Meta and Amazon cutting back their proposed footprints in New York; and office vacancy nearing 30% in the Portland metro market.
Office remains tenuous as the COVID recovery heads straight into recession. Some internet sources believe that a recession may actually drive people back to the office if layoffs become necessary; The first folks to go will be the ones unwilling to return to the office.
Regarding retail, Lynn looks back to late 70s and early 80s when “the inflationary spiral laid the foundation for an earth cracking recessionary cycle.” He continued, “I believe that this is the first year of maybe 4-5 years that you’re in a completely different economic environment. I think we will see a major decline in retail sales volumes simply because people don’t have the money to buy online or in brick and mortar. Walt added that online retail may fair much better than brick and mortar if fuel prices stay elevated. Consumers will change their driving habits, drive less and possibly continue to buy.
Which verticals look to withstand the pressure? Always the commercial real estate darlings: industrial and multifamily. Big box industrial will benefit from the supply line crisis. Manufacturing simply must catch up. And while development will likely slow, infrastructure, plumbing, electricity, HVAC require maintenance.
“Apartments will be strong because of home-ownership challenges and upward pressure on rents,” said Chuck who specializes in multifamily. Jeff added, “This is an unforeseen consequence. Rent control is tied to CPI so allowable rent increases in September could be huge.” Chuck continued, “Raising rents 15% in an inflationary period just doesn’t make sense.”
So how do these recession veterans think will get folks through? “Cash is king. Watch your expenses and continue to build your war chest,” said Jeff. “Keep working. Put one foot in front of the other,” said Walt, partner and broker, who continued, “I’m excited about how we’re poised as an office. We’re lean and mean. I don’t want to be the thousand-pound gorilla when things get tight and it’s time to feed it.”
Lynn added, “Whether it goes up or whether it goes down, there’s always a role for marketing and sales. We are the gateway for the movement of money in good times or in bad times. As we begin to see how this recessionary period that’s likely to come forms, we’ll be able to discern the hot spots.”
Chuck who remained the most optimistic throughout the conversation finished with this: “At the end of the day, you’ll always have a motivated seller. You’ll find a motivated buyer if the price is right. There will be sales transactions.”