No one knows exactly when the recession could hit or how severe it may be. But there is no denying recent events indicate this record-long economic expansion may be reaching its conclusion.
The inversion of the 10-year U.S. Treasury yield curve has raised alarms, as it has been one of the most reliable signals of recessions in the past. And while the next downturn is predicted to be shorter and more concentrated than in years gone by, many investors are exercising caution.
The economic outlook will be a major topic at Bisnow’s National Finance Summit in Manhattan this month, so we reached out to some of the industry’s biggest players to ask what assets classes could feel most pain in a slowdown, and how they are preparing for what could lie ahead.
There are increasing indicators and factors pointing to a possible recession by 2021. What is your view on the timing of the next downturn?
Mosaic Real Estate founder Ethan Penner: The inverted yield curve is a very telling sign and, combined with the dislocation associated with the Trump trade policy, should have folks concerned about a global economic slowdown. I find it wasteful to try to forecast timing of the technical recession, and prefer to just acknowledge that we’re likely to be experiencing slowing down even now that could/should last for a bit.
KKR Head of Real Estate Americas Chris Lee: We don’t know when the next recession will occur. However, we do see tangible evidence that we are in the advanced stages of an economic cycle and growth outside of the U.S. has been slowing.
GTIS President and founder Tom Shapiro: There have been 11 recessions since World War II on average lasting 11 months — so about every six to seven years. But the timing has been anything but consistent. The inverted yield curve, which happened in mid-August, is considered one of the more reliable signals, with recession typically occurring 12-18 months after the inversion.
That would point to late 2020 or early 2021, and is as good a predictor as any — but we are not making bets on the timing. What we know is that recessions play out differently; from the oil shocks of the 1970s, hyperinflation and the Volcker interest hike in the 1980s, S&L crisis in the early 1990s, to the dot-com bust in 2001 and the mortgage crisis in 2008. The common element is that recessions begin with large imbalances and a trigger.
Today, the biggest imbalances are in trade and national debt, and the tariff war seems to be the likely trigger. A mishandled trade war could have serious consequences.
Angelo Gordon co-Chief Investment Officer Adam Schwartz: No idea on the timing of the next recession. I think we are entering a slow growth period, and to the extent we see an actual recession, I expect it to be modest. In the meantime, real estate fundamentals are holding up well, and the Fed seems keen to do what they can to moderate any economic slowdown.
Capital One Multifamily Finance Head of Agency Production Phyllis Klein: In terms of multifamily, the signs are not there for an imminent recession. However, I anticipate that rent growth will be more limited than in the past, and there is a significant amount of inventory coming on the market. I also believe that 2021 will be slower in terms of acquisitions, especially in the area of value-add.
Wharton Equity President Peter Lewis: I am not as concerned as others about a downturn, as I believe the president will maneuver to keep the economy strong leading up to the election — this includes resolving the trade issue. Further, I do not think we should be viewing the longevity of the current cycle as a reason to believe a downturn needs to occur shortly.
The concept of “cycles” came about before the internet came into existence. Today, with adjustments being made to the markets in nanoseconds, I would argue that factors which lead to elongated business cycles in the past are being adjusted continuously, which changes the concept of how our economy will behave over time. That said, a slowdown will occur at some point as overbuilding and other overzealous variable comes into play.