Episode 3: Behind the recession headlines

Victor Calanog
Head of Commercial Real Estate Economics
Moody’s Analytics

Behind the recession headlines

Jan 30, 2023 4m 12s

Hear from leading expert, Victor Calanog, as he reads the economic tea leaves and share his thoughts on how concerned we...

Michael: If you follow the commercial real estate market, then the name Victor Calanog is a familiar one. Victor is the head of commercial real estate economics at Moody’s Analytics. Thank you for being here to share your thoughts and market predictions. Victor, all eyes are on the economic tea leaves right now, and everyone wants to know how concerned we should really be about the economy. So, are we destined for a recession, and what would that mean for our market in 2023?

Victor: The economy is in a fragile state, and it just became more and more fragile throughout 2022. Let’s quantify that. In January of 2022, we were expecting that U.S. real GDP would grow by 3.4%. As of November of 2022, well, those expectations have changed because of the many ups and downs that we went through. We’re now projecting a 0.07% growth rate. The baseline is still not recessionary, but the probability of recession rose from a typical 10% to 15% for any given year where we’re expecting the economy to continue growing to a really statistically worrisome 50% to 65%. So, we’re expecting that there will be recessionary pressures throughout the next 12 months in 2023. It wasn’t a surprise that the Federal Reserve was going to tighten monetary policy. We knew we were headed there after the COVID crisis, and after a very strong 2021 when inflationary pressures really would prompt the Fed to go through with its mission for price stability. We knew they were gonna raise rates.

There were two basic surprises on the other side when it comes to interest rates and other rates like mortgage rates rising. It rose really quickly. It spiked just anticipating what else would happen, what else the Fed would do, and how the economy would react. The 10-year treasury rate, which is the benchmark for a lot of commercial real estate investments because of the similarity of duration went from an all-time low of sub 2%, sub 1%, spiking all the way to 3.5%, 3.8%, and actually above 4% several times in the year only for it to go down to sub 3%. And now as I record this, at or around the mid-3s. So, it was very volatile throughout 2022, and unfortunately, that’s what you should probably expect for 2023.

Michael: Perspectives have really changed in the last year, and I realize that forecasting anything right now is tougher than ever. But what gives you the most optimism about our industry in the New Year, and what predictions would you feel most confident about?

Victor: I think what makes me optimistic about certain sectors in commercial real estate, like multi-family and industrial, is that it really does have a lot of wind behind its sails when it comes to through-the-cycle projections of demand. Yes, we’re building a lot of multi-family units this year and next. We’ll see, given how construction financing has really begun drying up because of everything else that’s been going on in the economy, how many of those units are actually delivered. But over the long run, there is still, at least at the national level, a shortage of housing, and very, very strong both renter demand and owner demand. And so, through the cycle, we are going through some rough patches, both for single-family housing, but for multi-family, rents have really held steady. It’s climbed down from all-time highs from 2021, but if we’re going to be pulling in anywhere from a 6% to 7% annual growth rate for effective rents in 2022, that’s still not a bad year. And for distribution warehouses, and the industrial sector, that real tailwind from e-commerce and logistics is still very, very strong despite the pullback in consumption of goods and near-term announcements from retailers like Amazon and Walmart that they’re scaling back on things like warehouse expansion. Through the cycle, we do expect that demand fundamentals are going to be pretty robust for these two property types.

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