A respected industry analyst says those who succeed in picking, buying, financing and managing properties during a downturn will be set up to thrive when the economy improves.
While no one knows when the next recession will arrive, Ryan Severino, Chief Economist at JLL and an adjunct professor at Columbia and New York universities, is seeing signs that a downturn is getting closer.
“Growth will decline from ’18 to ’19 and ’19 to ’20, and we’re going to have to see if things hit the fan in 2021,” Severino said at NAA’s Maximize Conference, Sept. 23–24, in Atlanta.
Indeed, he’s already seeing some trouble on the horizon. “Objectively, [interest] rates are still low by historical standards,” Severino says. “Yet, investment is starting to pull back.”
When the recession does come, Severino thinks global political instability or unwise policy decisions will likely be the cause.
“We’ve entered a place where policy is starting to become a very big part of this economic outlook,” Severino says. “Most recessions are caused by policy errors.”
Specifically, Severino points to the trade war as a potential cause of the next recession. “[The trade war] isn’t doing very good things,” Severino says. “Trade is the linchpin on which a lot of this stuff hinges right now.”
In addition, political and economic tensions around the globe could spark a problem. “There’s no shortage of political risk in the world today, especially [regarding] policy,” Severino says.
When the next downturn does come, Severino isn’t sure there will be the political will to increase spending. “Spending is a lever that the government pulls to get the economy going. I’m not sure how many people are going to want to pull that lever next time,” he says.
Supply Concerns
The apartment industry is fairly well-positioned for the next downturn, though Severino does have some concerns about supply.
“Supply will start ramping up again,” Severino says. “If the economy goes into a recession, absorption may be more difficult with more supply.”
While supply could cause problems in the Class A space, other locations and asset classes could thrive. Severino thinks suburbs to primary markets are poised to do well as millennials leave the urban core. He also likes older product. “I like B and lower product in a recession,” Severino says. “The demand there is incredibly stable, and supply has gone down.”
As a sector, Severino says, the apartment industry has some advantages going into a downturn. “There’s still a lot of demand out there, especially with for-sale housing being so expensive,” he says.
Even in a sector positioned to weather the downturn, there will be winners and losers. When the recession comes, the skill will be the most important factor in determining success, according to Severino. “Companies will rely on skill—picking, buying, financing and managing properties—to succeed,” Severino says.
The good news is that those who succeed in the worst of times are often set up for success when the economy improves. “The most successful people I know in real estate made their way in times of trouble,” Severino says.