With high inflation and rising interest rates dominating the news cycle, the potential for a recession is top of mind for commercial real estate. Morrison Foerster’s 44th Economic/Real Estate Poll June–August 2022¹ found 68% of respondents across the industry believe the U.S. is already in a recession or will be in one by the end of 2022. 

To determine how a recession might impact commercial real estate, we spoke with Tom LaSalvia, Senior Economist and Head of Narrative Analytics at Moody's Analytics CRE, along with several JPMorgan Chase clients and industry experts.

_{¹ informal poll series conducted by Morrison Foerster’s Real Estate Group}

Other economic factors may also benefit multifamily properties. 

“The headwinds the broader economy is currently facing actually provide benefits to owners and operators of multifamily real estate,” said Roger Daniel, President and Founder of Daniel Management Group (DMG). “Inflation, for example, tends to drive rents higher. Rising costs and delays on new construction tend to constrain supply, which also increases rents on existing properties.”  

Affordable housing

“Affordable and workforce housing currently have tight market conditions: 2.3% for affordable, 3.1% for class B and C housing,” LaSalvia said. “Demand is high and would likely remain relatively strong for both of these property types. This, combined with weak supply growth over the last decade plus, we expect performance variables to hold up well.”

“Economic downturns tend to not only increase the need for affordable housing, but bring a renewed focus to increasing the supply,” said Vince Toye, Head of Community Development Banking and Agency Lending for JPMorgan Chase. 

Nonetheless, the possibility of a recession raises concerns. 

Industrial properties

The ongoing demand to get products in consumers’ hands as quickly as possible means the industrial asset class has continued to perform well. But in a recession, industrial properties associated with elastic goods may feel the effects of reduced consumer spending. 

“As consumer demand wains, the industrial sector is likely to slow as inventories are managed down and the demand for industrial space decreases,” Reimers said.

LaSalvia agreed, noting that industrial’s relatively strong runway could be beneficial if demand goes down.

Retail properties

While a recessionary environment would likely slow retail’s growth, the bigger concern is retail’s evolution.

59%

Believe the U.S. retail sector has emerged from the bottom of the real estate cycle

^{Source: Morrison Foerster’s 44th Economic/Real Estate Poll June–August 2022} 

Neighborhood retail centers in densely populated areas continue to perform well. That’s not the case for all retail, though. “B and C class malls are already limping, and a recession would put them through a difficult economic period,” Brooks said. 

“Retail performance has steadied. While not growing quickly, the evolution of omnichannel and experiential retail will keep brick-and-mortar retail relevant for the foreseeable future.”

Office buildings

Offices are also evolving as employers try to find the best balance of in-person, hybrid and remote work.

“The trial and error of varying work arrangements will be more influential for office than a short, mild recession,” LaSalvia said. “But a recession could hurt hiring and might cause some firms to delay plans to build or expand offices, at least in the near term.”

Class A office buildings, which offer a breadth of amenities, continue to perform well with limited vacancies. But in a recession, employers may look to B and C properties as an opportunity to save.

How to prepare your business for a recession 

As recession fears heat up, it’s important that you continue to operate your business at a high level and ensure your business is “recession-ready” for when it comes. For example, Daniel of DMG is conscious of a potential recession, but his operations are firmly rooted in the present.

“We have put some construction projects on hold because of current pricing and current delays—not because of what we are anticipating down the road,” he said. “We will continue to watch pricing and economic trends to determine when to execute.”  

Long-term thinking is also key for commercial real estate as it approaches a recession.

“The best thing you could do—this is critical—is not stretch your balance sheet as we go into a recessionary environment,” Brooks said. “It’s key to have the liquidity and cash flow coverages to make it to the other side of a recession. Then you've got the opportunity to pick up some real bargains in great neighborhoods and great markets.”