How a Potential Recession Will Affect Commercial Real Estate Valuations

While most economists agree that the US is not currently in a recession, the possibility is still looming.

That’s because inflation is at a forty-year high, and interest rates and markets are becoming more volatile. The Federal Reserve is making efforts to calm any potential fallout by tempering demand and taming prices, but it may not be enough to stop a recession in the near future.

For those in the commercial real estate sector, there is obviously some concern that this will cause some disruption in market activity and potentially even lower costs and cool off a thriving market. Luckily, however, it seems likely that any impact on commercial real estate will be limited.

One reason for this is that commercial real estate transactions reached an all-time high in 2021 with approximately $846 billion in recorded transactions, which is almost double the 2020 rates of $431 billion. Due to several factors, the commercial real estate markets are expected to keep up until 2024 at least.

But while the commercial real estate market will likely continue to flourish, there are some changes to look out for and some important steps real estate professionals may take in order to hedge against any potential losses.

Signs of Recession

In any scenario, an impending recession is a dreaded scenario for much of the world, and yet they are an unavoidable marker of market correction and rebalancing.

A recession is defined as a “significant decline in economic activity that is spread across the economy and lasts more than a few months,” which takes into account the depth, diffusion, and duration of the dip in activity.

Economists will look at employment, spending, industrial production, and income levels to determine the presence and severity of a recession.

The onset of the pandemic in 2020 saw a very short, two-month downturn that rebounded with very healthy market activity. Economists are not predicting another recession to strike until the beginning of 2024, though some feel that it could strike sooner, owing largely to the rising prices of gasoline and other geo-political factors.

Even so, it is predicted that any recession on US soil will be mild or moderate but that it could last a little longer than usual. In fact, the whole global economy is predicted to face a similar scenario caused by high inflation.

Demographic Shifts

One factor of inflation that will show signs in commercial real estate is inevitable demographic shifts for everything from residential to business to industrial real estate.

Housing and industrial inventory are quite low around the US, so demand is consistently higher than supply, making an investment in any of these sectors a sound decision.

As urban centers become more and more unaffordable, workers are moving to rural and suburban areas and are either taking their work with them or bringing with them a higher demand for satellite office space.  

Hedging Against Inflation

When investors get nervous about upcoming inflation, commercial real estate is where they turn to balance their portfolios in order to weather the storm. This is because commercial real estate is typically the least impacted as compared to other investment markets.

While equities and bonds can be more sensitive to market flux, commercial real estate is much sturdier and safer in the long run.

The concern is that higher interest rates mean higher mortgage and lending rates, but at the moment, the real estate market is healthy and capable of withstanding a decrease in demand since there is low stock in some commercial real estate sectors.

One reason why commercial real estate, particularly multi-family residential real estate, remains a safe bet is that typically rents will increase along with inflation so that owner income is able to keep up with market fluctuations.

Good News for Commercial Real Estate Professionals

The good news here is that commercial real estate employees like appraisers, brokers, and agents will not have to struggle to find sales, but they will need to be able to keep up with the shifting needs of the market.

One way appraisers can adjust to clients’ shifting needs and stay on the cutting edge of the market is by switching to cloud-based reporting software so that clients can easily access reports when they are looking to buy, sell or refinance in response to market flux.

Valcre offers evolved appraisal software that empowers users to have a more organized and efficient platform for producing, presenting, and sharing their work. Contact us today to find out how we can work for you.