The Rumblings of a Double-Dip Recession Against Positive CRE Performance

While the worries about a double-dip recession are valid, there are strong fundamentals within commercial real estate - especially in multi-family and some office markets - that may hold off disaster.

After the IMF warned of a potential double-dip recession just a few days ago, the whispers have become full-fledged shouts: The dangers facing the world economy are real. “Markets have clearly become more skeptical about the ability of many countries,” said IMF chief economist Olivier Blanchard, “to stabilize their public debt.”

Real estate markets, of course, will feel the pain more acutely than most, and the problems on the horizon are twofold. “We’re all alarmed by the jobs numbers in August,” Rosemary Scanlon, clinical associate professor of real estate at New York University’s Schack Institute of Real Estate told Commercial Property Executive. “The second issue is the euro debt crisis. It’s not easy to figure out what’s going on and why. Since the Greek crisis emerged last February, [the European central bank] has been slow to develop a mechanism for dealing with it.”

While the ripples outward from these market pressures will have a negative effect on commercial real estate, there are pockets of individual cities which are doing well. Lower Manhattan, led by the revitalization of the World Trade Center site, is currently the site of the largest expansion of office inventory in the country. By 2016, 15.4 million square feet of Class A stock will have been constructed since 2001. A report by Marcus & Millchap pegs trading volume for those trophy properties through the first eight months of 2011 as double the rate for the entirety of 2010.

“In those certain office markets, in New York, in D.C., maybe in Chicago, they send signals to the next tier of cities that things are stabilizing,” Scanlon said.

But CRE investors and property holders seem to be waiting for those signals, but no one definitive sign has yet come forward. While the Fed has lowered interest rates to their lowest levels in 60 years, the central bank may now be out of ammunition to have much more of kick-starting effect on the economy. “We may have a watch-and-wait situation, waiting for clearer signals to emerge,” Scanlon said.

While the office sector in those select markets is performing well, the outlook for the multi-family market is positive throughout most of the country. “A healthy recovery is already occurring in the multifamily sector, with average apartment rent expected to rise 2.5 percent this year and another 3.2 percent in 2012,” Lawrence Yun, chief economist for the National Association of Realtors, said. “Multi-family housing continues to benefit from pent-up demand resulting from an abnormal slowdown in household formation in recent years.”

But could the current demand for apartment housing – partially driven by the numbers of younger Americans who, facing un- or underemployment, are choosing to rent longer – affect the housing market in the long term?

“I’m waiting for the rush to happen,” Scanlon said. “One of the best signals you can have is perhaps not to have low interest rates, but to threaten to raise them. In a few months, you’d have a stampede of people saying ‘I want a mortgage tomorrow.’”