Is the CRE expansion over? Five factors to be aware of as recession looms

By Brent Avis, Investment Services Group

The United States is in the tenth year of the longest period of economic expansion in history, but it won’t last forever.

If you’ve been watching or reading the news lately, chances are you’ve seen warnings of an impending recession. Whether it hits this year, next year or beyond, you should be prepared.

Historically, the spread between the U.S. Prime Rate and cap rates turns negative preceding a recession. As seen in the graph above, that is happening now in the industrial market.

It’s time to start paying attention to the signs in the market that are pointing toward recession. Here is what we are seeing so far:

  1. Market shift could begin as soon as the second half of 2019

    We're looking at 3Q-4Q of this year to begin to see the market shift. This can manifest as decreasing sales prices, lower transaction volume, an increase in cap rates as well as more time-on-market.

  2. Interest rate hikes

    The Federal Reserve is expected to increase interest rates by an additional 50 basis points to 5.75% in 2019.

  3. Increased interest rates eventually impact sale volume

    Rising interest rates creates downward pressure on sales volume. Sale volume peaked at 71.5M SF in 2015, right when interest rates began rising. Generally, there is between a six- and nine-month lag in seller adjustment to the market.

  4. Interest rates on all types of loans are increasing

    10-year money of all types (CMBS, Banks/Credit Union, Life Company) is currently being priced somewhere between 4.7% and 5.3%, while the average industrial cap rate across Southern California is 5.07%.

  5. Prices have likely hit the peak

    Industrial sale prices will decline through the recession. Between the prior peak in 2008 and the low point of 2010, industrial sale price per square foot in Southern California fell 50% from $122 to $61. Recovery brought the average sale price to $162 in 2018, up 165% over the low point. If history is any indicator, it could be a decade before prices return to the current level.

 

Is it time to start considering a disposition strategy? Contact me for market reports, information on available properties or an Opinion of Value.

Brent Avis is a member of NAI Capital’s Investment Services Group. He can be reached at 818.815.2420 or bavis@naicapital.com.

For more market information, see the NAI Capital Research Page.