With the U.S. economy continuing to extend one of its longest stretches of post-recessionary expansion, policymakers and market participants are beginning to ponder the timing and magnitude of the inevitable next recession. Whether it’s a year or eight years away, investors in U.S. commercial real estate are wondering what it will mean for CRE performance: Will certain markets or asset types be more immune to its negative effects than others? How will markets differ in the magnitude of the effects they experience, and in their speed to recovery?
To answer this question, in a recent study, we examined the effects of a major 2008-type recession on the 10 largest U.S. office markets. We analyzed how rents and vacancy would respond to severe drops in employment in each market, finding major response differences among markets.
Our key findings were:
When the recession inevitably comes, taking account of the differences between markets and the factors that drive them will play a crucial part in preparing investment portfolios for recessions, and in identifying investment opportunities when the economic cycle returns to its growth phase.
Estimated Rent and Vacancy Response to a Deep Recession Scenario
Source: CBRE Econometric Advisors, Q2 2016.