- These are economic perilous times with inflation, rising interest rates, and lots of uncertainty.
- The economic indicators suggest that a recession may be on the horizon.
- For a well-positioned investor, however, a recession can provide lots of investment opportunities.
There has been a lot of talk about the economy recently – and understandably so. Its weird out there. Inflation is rampant. Interest rates are increasing rapidly. And there has been a lot of talk about a potential looming recession.
But nobody seems to know exactly what’s going to happen. And while this is nominally a commercial real estate blog, obviously our industry is heavily impacted by what’s going on in the world around us.
So that’s what I’m going to write about this week. What is going to happen in the near future in the economy and how will it affect the real estate world? Are we heading to a recession? Lets find out.
Economic Peripherals Point to Some Trouble
As I wrote above, and as everyone has been talking about, we are seeing some pretty severe inflation throughout the country right now. I am writing this the morning the new inflation report came out and we hit a new high in June. The consumer price index rose 8.8% compared to last June. That’s the highest increase since 1981. And anecdotally, you do not need me to tell you that prices are increasing. And there does not seem to be an easy end to supply chain issues increasing prices. Both the war in Ukraine and COVID caused severe distress to supply chains and I’m just not sure when those will be resolved.
And that means that the Fed is likely going to continue to aggressively raise rates. It has already signaled a 75 basis point hike at its next meeting. And if the numbers continue like they are, that will not be the last hike. As a result, while commercial real estate investors could get rates in the 4s a few months ago, now we are looking more in the 6s.
So what does this mean? Is a recession imminent? Or could we even go back to stagflation of the 1970s?
A recession is two consecutive quarters of negative economic growth. The causes are plenty, as we are currently seeing. They can include:
- A sudden economic shock – surely COVID and the war, as discussed above, would qualify here.
- Excessive debt – When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they cannot pay their bills. Growing defaults and bankruptcies then hurt the economy.
- Asset bubbles – We’ve all seen the drastic increase in housing prices the last few years. Is that a bubble or a resetting of the market?
I do not have any clear answers. I hope we are not cruising towards a recession. But it is certainly possible that one is around the corner.
Recession does Present Opportunity
I want to be clear when writing this section that I am not being Mr. Burns-ish here. I do not want a recession to come. But most of us are real estate folks and sometimes when a recession comes, opportunity follows. And it would make me happy to see y’all make the best of a bad situation.
So as we discussed above, interest rates are on the rise and there is not a quick end in sight to that. That may make it difficult to refinance some projects. And it will have to increase cap rates. Because a buyer’s costs necessarily increase.
As a result, there may be some distressed assets out there that are available to acquire. And a savvy investor may be able to make some wise purchases. The flip side of that, of course, is there seems to be a lot of money on the sidelines. So while there may be opportunities out there, I think we are likely to see a lot of groups still going after those opportunities.
Well as you can probably tell, in a great lawyer tradition, I do not have any definitive answers. But the next couple of years are going to be interesting times. And if you are well positioned, it could be a good time to invest.