Is the real estate slowdown headed for a hard or soft landing?

Private real estate participants are divided in opinion over how the economic recession will turn out.

While the global economy is bracing for a recession in the coming year, Richard Barkham, global chief economist and global head of research at CBRE, believes the downturn may be less severe than expected.

Speaking at the PERE America Summit 2022 in New York on Tuesday, Barkham said it was “good news” the US inflation rate – clocking in at 7.2 percent in October, down about 200 basis points from September – was lower than expected. “But we need to take it in context. Inflation will still end the year at above 7 percent and it is still raging in the US. We have to get it down from the high levels and back into a world where it hovers at around 2 percent,” he said.

Barkham believes it will take time to get inflation under control, noting it is likely to happen in the US first. He also believes there is a chance the recession could be more moderate than what was seen during the GFC.

However, “we have to take some demand out of the economy,” he said. “But it is not linear, it is not like turning down the volume on the television, it accumulates and I think we will see a recession in 2023. It could be more moderated but there are a lot of things that could happen that we can’t foresee.”

On a positive note, supply has been kept in check, Barkham noted. “I am old enough to have seen the last four cycles, where I saw a wall of inventory heading toward the market. I don’t see that today, even though we have a large pipeline in the industrial and logistics sector. Even with the wave of housing inventory in the GFC, we haven’t overstimulated the supply side. That is a positive for a soft landing in real estate.”

Aaron Jodka, director of research, US capital markets, at Colliers, also had a more moderate economic outlook. “A soft landing to a moderate recession is our basis scenario, akin to that 2001-era recession,” he said. “We are not expecting a repeat of the S&L crisis or the GFC. This is not a banking crisis, it is an inflation crisis. It is an uncharted territory and we need to work through that.”

Maybe not so bad

Jodka noted that while there have been many headlines in recent days about major layoffs at companies, this may not be the worst thing for the economy. “Headlines are that Amazon, Facebook and other groups are cutting. We are seeing some cuts but we need it. There is a misallocation of labor and anyone who has tried to hire over the past two years knows it is brutal. We do need some slack in the labor pool,” he said.

Meanwhile, Christopher Merrill, founder of Harrison Street Partners, views job losses as having a more detrimental impact on the economy.

“It’s been a decade of free money and I think the losing of jobs will hit hard. We are just seeing the tip of the iceberg,” he said. “When you combine no longer free money with job losses, the question is what will happen this Christmas? Will people use their savings or hold back? We are trying to prepare for a tougher landing, where do you want to invest and be if there is a tough landing?”

Jodka pointed out that the current slowdown needs to be put in context, particularly around benchmarking. The record transaction activity seen in 2021 is not a good comparison for today. “We are in a situation where using 2021 isn’t a great idea to benchmark. Where are we today relative to 2015-2019? Looking to that longer-term context would be helpful going forward,” Jodka added.