The yield curve inversion and threats of an escalating trade war recently sent markets into a tizzy last week.
If those economic jolts are going to hit the real estate industry hard, it largely hasn’t happened yet. But that doesn’t mean there aren’t red flags waving in the wind and questions over long-term growth aren’t lurking in the background.
“This is the tenth inning of a nine-inning game,” Time Equities Chairman and CEO Francis Greenburger said. “You realize that one day it’s going to end.”
For the most part, there is optimism in much of the industry. Big deals are getting done — think Blackstone Group’s nearly $19 billion industrial play — and there are funds looking to park excess capital. Interest rates are also at historically low levels.
“There’s still a glut of capital looking for some sort of yield worldwide,” said Jim Costello, senior vice president at data firm Real Capital Analytics.
And when the Dow plunged 800 points last week, after the yields on short-term bonds pushed higher than long-term bonds, real estate stocks held their own. A similar scenario played out when concerns over an escalating trade war between the U.S. and China intensified.
But Savills’ Chief Economist Heidi Learner wouldn’t expect that trend to last, if the U.S. reaches a full-blown recession. Real estate firms tend to derive their revenue from within the country, and with a strong dollar, that helps insulate real estate stocks more so than other sectors.
“I think the fact that we haven’t seen a more dramatic compression in cap rates more recently suggests there is more concern about growth going forward,” she said.
In the second quarter, commercial real estate prices declined in 10 out of 18 global metros that make up Real Capital Analytics’ global price index, and global price growth slowed to 4.4 percent.
And in the first half of the year, there was some hesitancy from buyers and sellers, leading to a slowdown in U.S. commercial deal volume. That has started to pick up again, thanks to cheap credit and falling interest rates, Costello said. “Some folks have gotten past the weakness we had in Q1,” he said.
But that’s not to say there aren’t other factors on the horizon to watch for. Job growth has been tepid, and if it slows further, it could signal that companies are cutting back and are concerned about the future. And those jabs between the U.S. and China over trade? They, too, could be giving some investors pause.
“The impacts of the trade war are really being felt and that is undermining corporate investments, undermining growth,” Costello said.
Some in the industry are already making adjustments ahead of a potential economic downturn.
Landlords may be looking to secure long-term leases. And sellers, who had been holding out for better deals to come along, may be more willing to sell a property at market price.
“If a seller is debating [whether] or not to sell, it’s an easier decision,” said Jimmy Hinton, senior managing director of research services at Transwestern. “They’re either going to take their profits or refinance.”
At Time Equities, Greenburger said the firm buffers against recessionary periods with extra cash and contingency credit. And as a response to New York City’s microeconomy and its oversupply of high-end condominiums, Greengburger said the firm hasn’t developed another project since The Residences at Prince were completed several years ago.
“It was a normal supply-demand imbalance — that wasn’t in anticipation of recession — but it was indicative of something,” Greenburger said.
Meanwhile, Paul Massey’s B6 Real Estate Advisors launched a financing side to its brokerage business, in part to take a bite out of the commercial real estate debt market but also to insulate during a slowdown. “We think that the debt business is likely a hedge against what would be a slow period of investment sales,” Massey said. For now, the real estate industry appears to be in a wait-and-see mode, as the uncertainties in the economy play out.
“People might keep investing in real estate,” Hinton said. “The question will be, what will be the most appropriate value in an environment where there’s a lot of conjecture about future growth?”