C&W pegs the possibility for a mild recession at 50%, but high-quality office, certain retail and multifamily will remain good bets.
CRE property values are likely to slump as economic growth slows and bond yields rise, according to a new analysis from Cushman & Wakefield, which pegs the average decline if a “mild” recession happens to clock in at around 20% over the next two years and range between 4% and 23% depending on property type.
But despite that, “without question, certain segments of the market will thrive over the next few years, easily outperforming our national forecasts,” Cushman’s Kevin Thorpe, Rebecca Rockey, James Bohnaker, and Rob Miller note. But “we can’t emphasize enough that all real estate is intensely local.,” they say. “Not every product type or geography will follow the national glide path. Even within each asset class, a large portion will likely outperform our forecasts, and some will likely underperform. Within that volatility lies the opportunity.”
Cushman experts modeled four possible scenarios around the likelihood of a recession. The first “soft landing” scenario, which is pegged at a 30% probability, would see the Fed successfully recalibrate the economy without triggering a recession. GDP would then slow to around 2% this year and next. The second scenario, upside growth, has a 5% shot of materializing and would require supply chain issues and the Russia-Ukraine conflict to quickly resolve. Scenario 3, the “mild recession” model, is the one Cushman experts say is most likely to transpire (a 50% chance) and involves the Russian invasion of Ukraine continuing, resulting in a larger loss of oil supply and higher prices, and high inflation cutting into disposable income. This would see a recession by late 2022 or early 2023, but the underlying strength of consumers and business would keep the recession short and shallow.
Stagflation is presented as a fourth scenario, which would result in a “deep recession” by 2024, but Cushman experts peg the likelihood of that happening at just 5%.
Among the bright spots in a so-called “mild recession: high quality office assets, “the right retail” (think food-centered or grocery-anchored options), and multifamily, which is expected to see years of strong fundamentals ahead. Cushman experts recommend caution around e-commerce assets under this scenario, noting that “the sector is the most exposed to the rising cost of capital, meaning investors may want to monetize some low yielding core assets and keep their capital dry awaiting recap opportunities as debt maturities increase.”
“The fundamentals of the US economy are sound, which will help limit the magnitude and scope of a potential downturn,” the Cushman analysts write. “One of the most notable fundamentals is the strength of the consumer, which underpins 70% of GDP. US households still have over $2 trillion in excess savings to manage through a period of higher inflation and weaker income growth. Low debt levels, strong labor gains and wealth effects from higher home equity are also likely to insulate the consumer outlook. Moreover, healthy corporate and bank balance sheets will help mitigate job losses and keep the debt and credit markets functioning through the downturn.”