What Researchers Are Saying

By Robert Bach, National Director of Market Analytics, Newmark Grubb Knight Frank

I am privileged to belong to a group of real estate researchers that meets under the auspices of the Urban Land Institute at their biannual meetings, including the one this week in Chicago. It is not a formal ULI committee but instead goes by the name of Research Forum. Our group met yesterday afternoon in the monstrous McCormick Place Convention Center in downtown Chicago. There were about 40 in attendance from the large services companies, big investors, lenders, consultants and universities. Without disclosing the names or affiliations of the attendees, here are a few of the nuggets I picked up:

• One of the presenters asked the group when the next recession will be. Although we’re already in the fifth year of the recovery – long by historic standards – the consensus was that we won’t see another one for several years. With inflation and interest rates projected to stay low for a long time, the catalyst for the next recession is hard to foresee but could be another capital markets dislocation – a mini-black swan. The thinking is that the next recession will be mild.
• With the next recession still a ways off, there is time for trailing property categories such as suburban office and some types of retail to regain their leasing and capital markets mojo.
• The same principal applies to secondary and tertiary markets in the early innings of recovery. There should be several more innings left in the recovery cycle for those property markets to catch up.
• Rising interest rates over the next few years will constrain housing sales by locking in homeowners who have refinanced into low-rate mortgages, which means just about everyone. Assumable mortgages will become valuable again.
• Will rising interest rates put a lid on home prices? Not necessarily. The presenter said he and his team of academic researchers think rising inflation will accompany rising interest rates, supporting home prices and mitigating the higher cost of a mortgage.
• The betting seemed to be that interest rates, though volatile, will rise very slowly, more slowly than commonly expected. This – plus the possibility that interest rates won’t rise much at all in the absence of inflation – should provide some solace to commercial real estate investors who were spooked by the sudden jump in interest rates over the summer. Higher inflation, when it finally shows up, will translate into higher rental rates and construction costs, helping to support property values.

As we were leaving, I chatted briefly with a highly respected consultant who said she thinks real estate is in a sweet spot, meaning gradual recovery, low interest rates for a long time and low levels of new supply except for apartments, where construction has returned to recent averages. Unless construction ramps up, which isn’t expected, the sweet spot could last for a while.