Despite the possibilities of a major stock market correction or even the beginnings of a recession in the coming months, the forecast for commercial real estate in 2018 remains hopeful, according to Spencer Levy, head of research for CBRE in the Americas.
But in his address on the state of the industry and economy at NAIOP New Jersey’s Annual Meeting and Commercial Real Estate Outlook Meeting on Jan. 22 at the Short Hills Hilton, Levy warned of stagnation and unforeseen events in the economy, which he described as “black swans.”
“The recession has an equal chance of being next year, or potentially four more years,” he said. “Now is that a good thing or a bad thing? You might say that is never a good thing, no one wants a recession. Well, I’ll tell you what, I might want a recession. Not because I am a bad guy. Because the alternative is worse. What is the alternative? Riding along at a 2 or 2.5 percent GDP growth over the next couple of years, maybe forever.
“That is what the best forecast said as recent as a few months ago. We’re never going to get beyond 2 percent growth. It’s called secular stagnation. And sometimes a recession, not as severe as the one we just had, can be a clearing event and the economy can grow kind of like in the early 1990s.”
The most likely of so-called black swans, Levy said, is a stock market crash, but that would likely be a repercussion of another event rather than an independent occurrence.
And the new tax plan, he said, just seems to add an extra layer of uncertainty for determining where the economy is headed.
“We’re in an unusual period of time today,” he said. “Not only are we in a late cycle, but we have late-cycle stimulus. That means that the International Monetary Fund upgraded the growth expectation for the United States for 2018 to about 2.9 percent. Next year it was 2.5 percent, because it is very unusual to have late-cycle fiscal stimulus.
“Everybody that is in this room that is in industrial or office was hoping they would benefit. And you should, if the plan does what it is supposed to do, which is stimulate growth.
But while the new tax plan is expected to raise taxes in the state, Levy said in the near future, talent retention and acquisition will play a more significant role in the state economy than a new tax structure.
“Let’s face it folks: New York, New Jersey, California, Chicago, Hawaii, Maryland were high-cost places of doing business yesterday, they will be high-cost places to do business tomorrow, but that is not going to stop people from coming here,” he said. “[People] are coming here because of the same reasons they are going to most markets. They want live, work, play; they want the infrastructure. New Jersey has those things and space.”
The commercial real estate community, Levy said, should prepare for anything. And this, he said, means “going long” on debt. Because while there has not been a lack of liquidity in the market, a recession may lead to one.
Levy advised securing a capital debt structure now in the event of a low-return environment, as well as looking for cheaper capital partners overseas.
Luckily, overseas capital has begun to move inland, Levy said.
“Not a lot of this capital is going to the usual suspects: New York, Chicago, L.A.,” he said. “It is going to come to New Jersey, it’s already here. Because other than talent being the scarcest thing in the world, the scarcest thing in the world are large, high-yielding investments. And the yields are so low in those markets that they have to come out. Over 50 percent of the money is already coming out.”
The diverse mix of industries in New Jersey and overseas capital coming to the state, Levy said, could help advance the urban-suburban trend in the state and commercial real estate, including retail.
“The single most overblown story in real estate last year was that retail is dead. Wrong,” he said. “The second most overblown story is that e-commerce killed it. Wrong again.
“The No. 1 disruptor of retail isn’t e-commerce, it is demographics. It is changing populations patterns, it is money moving in and out of neighborhoods, so even if one type of retailer is no longer viable, it can be replaced with something else. The fundamentals are still good in those areas that have good demographics.”