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Bracing for a Potential Major Correction

Over a decade has passed since 2008’s downturn and recession, and despite leaps and bounds of progress in real estate lending, anxieties still linger when it comes to financial futures in the real estate market. While 2018 saw a sometimes jittery stock market, job growth, new construction, and homebuying remained strong. So, what are we to make of headlines and op-eds musing on the potential of a recession in the near future? For starters, there are three key factors to assess when measuring the health of an economy and its potential impact on the commercial real estate market: building, inflation, and debt.

Building

Sustained over-building is a common signifier of a real estate recession to come. While building remained somewhat steady in the commercial real estate space last year, it actually lagged by a margin of 0.2% in 2018’s fourth quarter when compared to its historic average. What does this mean for commercial real estate prospects? Building trends in the commercial sector haven’t soared above average, which means rates of production are staying safe and steady—a positive indicator of stable growth to come.

Inflation

Next up, it’s worth considering inflation, its impact on a potential recession, and how it might affect the health of the commercial real estate market. This metric has several aspects, with most data leaning positive and others less so. While there was a brief flare-up in 2018’s last quarter, which caused a minor uptick in what’s called personal consumption expenditure (PCE) and which made some pundits speculate about a coming recession, this episode resolved in short order. Core inflation abated to its 1.7% yearly rate, which was average.

However, there’s some cause for concern in regards to capitalization rates, which are at levels low enough to correspond to pre-recession periods. Here’s the bottom line: While some of these factors portend good news, far fewer of these factors indicate coming calamity. Solid fundamentals abound: Vacancy rates are low, and an increase in demand has contended with an increase in supply. To boot, bond yields are low—all of which coalesce into a favorable investment landscape within commercial real estate.

Debt

The final key factor to consider when bracing for a financial crisis that may or may not come to pass: untenable debt. Because borrowers and the majority of lenders have taken a cautious approach following 2008’s downturn, debt burdens are the lowest they’ve been in 38 years! Commercial real estate holders have deleveraged their debt position as well. Since 2010, commercial real estate debt has risen only 2.4%, which falls far behind the historic average.

Now, all that may sound like a lot of hazy facts and figures, but the main takeaway is that, overall, the economy is chugging along at a steady rate. Buyers and lenders are more circumspect since the recession shifted markets more than a decade ago, and building isn’t outpacing demand by an unhealthy margin. It’s prudent, as always, to keep an eye on how markets are developing and how the health of the economy is faring on the whole, but so far, the risk of a recession isn’t imminent, and confidence is on the upswing for the American consumer. Good news all around.

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