“Economists generally expect [the United States] will experience a downturn . . . over the course of 2020 or early 2021,” says Sam Chandan, a trained economist, an associate dean of New York University’s Schack Institute of Real Estate, and a host of the Real Estate Hour on SiriusXM Radio. Chandan presented his “2020 Economic Forecast” at a ULI New York event in November.
But Chandan expects a recession, when it comes, to berelatively brief. “Any recession in modern economic history has been relativelyshort-lived compared to the period of growth to follow,” he said.
Standing room only this morning to hear @samchandan’s report on the economic forecast for 2020 pic.twitter.com/jxV5XuKoqW— ULI New York (@ULINewYork) November 1, 2019
Given the length of the current economic expansion, Chandan isamong those who are already focused on where opportunities to invest in realestate might appear after it is over. Data and in-depth analysis will helpinvestors make the best decisions. And collaboration and cooperation will helplawmakers and local officials create the best policies to encourage growth.
Chandan himself is not predicting a recession in the nearterm. “No economist wants to go on record as saying that the downturn will bein 2020,” he says. “If it isn’t . . . then they will be remembered for that.”
Instead, Chandan is taking a close look at forecasts made byother economists. In October 2019, nearly 50 economists surveyed by the Wall Street Journal revised theirestimates of how much the U.S. economy is likely to grow in 2020 to 1.6percent. That is not a recession, though it is down from their average forecastof 2.0 percent growth the year before, according to the Journal’s EconomicForecasting Survey.
That is exactly what economists would do if they believed thata recession was likely: Forecast growth that did not stop but instead slowed significantlybelow the capacity of the economy. “They are hedging their reputational bets,saying: ‘You know what? I think the downturn is going to be in 2020. I justdon’t want to go on record as saying so,’” says Chandan.
Bond investors also are sending a clear signal that arecession might be coming, Chandan says. For several months now, investors havebeen willing to buy long-term government bonds at a lower yield they get from short-termgovernment bonds. These bond investors are effectively betting that FederalReserve officials will soon be forced to announce more interest rate cuts tosupport a faltering economy.
Economists and investors have wondered for years how muchlonger the United States can expand. As of November, it had been growingconsistently for 125 months—since the end of the Great Recession in 2009. “Thisis the longest expansion in modern U.S. economic history,” says Chandan. “Intheory, the expansion could continue.” However, clues like the inverted yieldcurve and forecasting survey point to a slowdown.
Investors Look for Opportunities
If the U.S. economy does fall into recession in 2020, it isunlikely to shrink for more than a few months before beginning to grow againfor several years, judging from the recent past, says Chandan.
Real estate investments are also likely to be less damagedby the next downturn than in past cycles. “Real estate doesn’t appear to be thesector where we are taking risks that won’t pay off,” says Chandan. “By andlarge, we have been fairly reserved in our development activity, in ourinvestment activity.”
That said, Chandan does worry about some loans made toapartment properties. “Commercial real estate has been much more reserved inthe expansion of its debt with the exception of multifamily,” he says. Lendershad $1.4 billion in loans outstanding to apartment properties. That’s twice thevolume of apartment loans outstanding just before the financial crisis, he says.
In the rush to make those loans, some lenders may have lenttoo much. The average apartment borrower carried $13.95 of debt for every $1 ofnet operating income in the second quarter of 2019, up from an average of lessthan $10 of debt in 2010, according to Chandan.
“Not all of that debt is going to have been structured in away that is going to survive maturing in a downturn,” says Chandan.
Real estate investors who have not overextended themselvesare likely to survive a recession without much damage. “Those who arepositioned defensively . . . are positioned to succeed when growth does returnto the market,” says Chandan.
These investors will also have new tools to findopportunities in a recovery. That includes extremely granular data that is lessfragmented that in the past—and a new generation of analysts and associates whocan mine that data so that investors can make better decisions, says Chandan.
That will help companies navigate the changing demand for realestate. “The way in which we want to use space is changing on a morefundamental level than we have seen in economic history,” says Chandan. “Obviousexamples include the way we choose to shop.”
Investors will also need strong data to navigate slowereconomic growth over the long term. The United States used to grow at a rate ofroughly 3 percent a year, or even more than 4 percent during expansions. Duringthe last decade, however, the usual rate of growth has hung closer to 2 percent.
“Over the last 10 or 20 years, the rate at which our economygrows has slowed,” says Chandan. The United States has chronically failed toinvest enough money on infrastructure in the United States. “That ultimatelyexerts significant drags on how productive we can be as individual economic agents,”he says.
The growing inefficiency of the labor market has also made ittougher for people to get back to work, becoming a drag on the economy. “Thenecessary skills that make you relevant have never changed more rapidly,” saysChandan. “We have more jobs open and available today than we have ever had. Thedifficulty firms report is they cannot find the people with the right skills tofill those positions.”
Chandan also sees a mismatch in the housing markets: “Thebulk of development that we have seen has been that class A, urban, high-risebuilding that is well amenitized and isin the top decile of the asking-rent distribution, if not even higher.”
That creates a glut of housing for upper-income people, andan expensive shortage for everyone else. “There have been eight years in a rowwhere the median American renter has seen his or her rent increase faster thanhis or her income,” he says. “If teachers, firemen, policemen, and other peoplewho serve community do not have the opportunity to reside within thecommunities that they serve, then the long-term economic outcomes that we seefor the city are impaired.”
The solutions to these problems will require cooperation andcollaboration, he says. For example, the cities best positioned to grow havethe ability to invest in regional transportation infrastructure that helpspeople get from where they live to job opportunities—and paves the way fordense, new, relatively affordable transit-oriented developments that relievestress on the housing markets.
In localities where stakeholders fail to cooperate, andhousing costs continue to rise, the pressure will also rise on lawmakers topass rigid, new rent-control laws.
“No one is winning with some of the outcomes that we areseeing and how we are going about trying to solve the housing affordabilitycrisis,” says Chandan.
