There seems to be some controversy about whether we have a recession. If the definition is only 2 quarters or contraction in the economy, then we do. However, normally, we do not at the same time see low unemployment rate and a trade surplus!
Our clients care less about technical economists’ readings and more about what the future will bring for commercial real estate investment. We never predict; we stay away from prediction. We will, however, pass along what some analysts are saying.
Marcus and Millichamp, who put out a regular analysis, explain: The contraction in GDP was largely because of reductions in business investments. On the other hand, exports are up and the service sector is strong enough to support the tightening labor market. Retail and travel, in particular, are just now beginning to match late 2019 levels. Multi-family is said to be “normalizing” meaning that after a nadir in vacancy rates, since now more units are being relinquished than rented – because eviction moratoriums are being lifted. However, in Texas, demand has remained high because of in-migration, and any eviction bans are history.
Over all, much of the increase is a sustained uptick from the shutdown, while the contraction may be a result of current policies. The fact that the fact checkers deny a purported headline about no-growth policy may not matter. The Fed says it will stick to its rate hike plan. However, it is known that interest rates increase typically cause a contraction on the job market, and so is normally not conducted in an election year. Further, what the Fed says the Fed will do has not always proven true. Then, we have no idea what will happen during and after the election.
MacAlvany, following Doug Nolan, points out that there are 3 variables that matter: interest rates, liquidity, and equity market valuations. If interest rates increased dramatically, many companies can not refinance their debt, and will face a liquidity crisis, and go bankrupt and either fire their workers or be purchased by bigger pockets. High unemployment is not normally favored in an election season, so they predict therefore that it must be the equities that will crash. Hear a much more detailed, less reductionist analysis.
However, social media illustrates that lenders are still soliciting business. Transactions are continuing. While home buyers expect asking prices to go down, CRE investors have more variables in their napkin calculations. They realize that interest rate increases might reduce asking prices in the short term, but in the long run real estate is a good hedge against inflation – to the extent that rents can be raised. Rents can be raised as long as there is no widespread downturn in unemployment in the region. Therefore, the distinction between a recession and a depression probably matters more than that between normal fluctuations and recession.
Either way, it seems that Austin and other large Texas major metro areas, CRE remain fairly stable, even if there are storms elsewhere because of regional variables. Here is what the Research Center at Texas A&M says: https://www.recenter.tamu.edu/articles/technical-report/Texas-Quarterly-Commercial-Report. In short, there was no contraction last quarter in Texas. No recession, then, in Texas.
It is very hard to predict which way the national winds will blow.