CRE investors can quickly recall the trauma of the 2008 Financial Crisis. Unfortunately, a declining commercial real estate market often accompanies a recession.

Recently, inflation became a real concern, thanks to several industries seeing spikes in prices. They had their pick of properties and the profit margins were phenomenal. The uptrend proved short-lived, however, and was largely due to a couple of special factors (telecommunications, auto insurance) causing a temporary rise in core inflation (the Personal Consumption Expenditure, excluding food and energy).
By December, the Great Recession would build steam, and the real estate market would take a nose-dive. But the challenges today are typical of the types of risks that the economy faces regularly, without heading into a recession. Lenders were engaged in highly predatory practices, and the market couldn’t withstand such a significant collapse in housing values. Nonetheless, the recession served as a wake-up call, which led to smarter investing and better lending standards.

In the fourth quarter, commercial construction put-in-place was 1.3% of GDP, below its long-run average of 1.5%, and has been below average since 2008. In March of 2020, this happened again after a continual 10-year “up-seller’s-market.” In the world of commercial real estate, property values are high, and capitalization rates are low, which can typically be signs of increased inflation. Before making any investment moves, however, you need to talk to one of our experienced brokers. “Consumer spending is certainly way off, which is a big driver of our economy. Stock prices fell sharply in December in a bout of turmoil that both reflected these concerns and fed the fears.Lately, though, we’ve seen increased evidence that this was a false alarm. It’s maybe a 55/45 [percent] thing.”Also making the case for optimism, a March report by Marcus & Millichap noted that sharp declines in interest rates should support refinancing and acquisitions in the space.Stolly contended that office and apartment debt deals are still being pursued by lenders, but admitted that hotel deals are still floundering.“We’re still getting some transactions done with some credit enhancements such as an income guarantee from a creditworthy operating company,” Stolly told CO. “But financing hospitality right now is generally on pause or lenders are being hyper-selective on leverage levels in the transactions.”Wacht said he worried, though, that the already historically low interest rates along with the recent tax cuts have left the government without the tools it would typically use to stimulate a shrinking economy.“The problem is, even during the strong market we kept rates low and we spent and we cut taxes, so we don’t really have those tools available to us,” he said.Knakal said that if there is a disruption in the commercial real estate business, it would likely start to show up in the third quarter sales figures, which will be indicative of contract signing activity in the second quarter.In the meantime, is there anywhere investors might look for a safe haven?“Yeah, I would start buying real estate in Antarctica,” Wacht said.The continent has reported zero COVID-19 cases to date. So I don’t see us getting out of this very quickly.”A recent commentary by investment management firm American Realty Advisors laid out one scenario for a coronavirus-driven slowdown, highlighting hotels and retail as the sectors most vulnerable (particularly, it noted, in markets like New York and San Francisco with significant exposure to Chinese tourism), with the office market also potentially vulnerable in the event that a downturn leads companies to delay or pull back on their leasing activity.“I was talking to a senior banker today who said there could hypothetically be a uniform debt bailout of the hotel industry, comparable to what may happen with the airline industries or the natural gas industry,” said Newmark Knight Frank’s co-head of debt and equity structured finance, Dustin Stolly.In a recent client note, BofA Securities highlighted data centers, grocery-anchored shopping centers, health care properties, and self-storage as market segments best positioned to weather an outbreak-driven downturn.“There are going to be a lot of lingering effects,” said Carlo Scissura, president and CEO of the New York Building Congress, an advocacy group for the real estate and construction industry.Restrictions on international travel and imports will inevitably affect the construction business, he noted, as well shutdowns of schools and universities and other sites where capital projects are ongoing.“What other things will be shut down? It will no longer be feasible to invest in plain commercial structures – demand will shift, and companies will want spaces that can facilitate digital growth. But why is that the case?

However, it turned out to be a false alarm, so no one panicked (too much). Also, as we already discussed, recessions force more people to rent. However, as long as you’re making enough to earn a profit after paying the mortgage, you will be sitting pretty. Households have deleveraged, with debt burdens the lowest they have been since at least 1980, according to the Federal Reserve. On Thursday, Wall Street saw its largest decline in more than 30 years. “Borrowers who have had transactions under application for a period of time and are close to closing are seeing those deals honored — we closed four deals this week — but with respect to transactions that are being marketed or in the early stages of application, it’s really lender-dependent.”But, while no one wants to see a recession, it’s not impossible that commercial real estate could escape a downturn relatively unscathed, said Robert Knakal, chairman, investment sales with JLL Capital Markets.He noted that in past recessions the investment sales market has not always tracked with the broader economy.“During the S&L crisis in the early ‘90s and during the Great Recession in ‘07 to ‘10, the investment sales market was highly correlated to the broader economy and really suffered,” Knakal said. We've detected you are on Internet Explorer. For the best Barrons.com experience, please update to a modern browser. In fact, he noted, one of his firm’s clients signed a contract yesterday to sell a piece of property.


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