Main Takeaway: Official data released yesterday shows that Q2 GDP growth in the U.S. hit -0.9% growth following negative growth in Q1. By many accounts, this means we are officially in a recession. Expect housing markets to decline in the coming 12 months as higher interest rates put the brakes on spending and economic growth. As such, operators must prepare for recessionary volatility and stay focused on their local employment and demand conditions.
Story: Generally speaking, a recession is when we see two-quarters of negative GDP growth. According to new data yesterday, the U.S. GDP shrank by 0.9% in Q2, following an earlier 1.6% drop in Q1.
Source: BEA
That said, there are no rules saying when they begin and end, and the White House recently released a piece moving the goalposts on the technical definition of a recession. Further, Fed Chairman Powell stated that he does not believe that we are currently in a recession following a significant 0.75% benchmark rate hike earlier this week.
Either way, the National Bureau of Economic Research (NBER) is typically the authority on declaring recessions. According to reports, the NBER is unlikely to declare a recession in the near term due to positive economic indicators such as high employment, consumer spending, and improved industrial output.
…For Now
Economists surveyed by both the Financial Times and Wall Street Journal believe an official recession is brewing. Both surveys strongly favored a forthcoming recession but put the outlook further into 2023.
Source: WSJ
Recessionary Pressures Impact on Multifamily
Given the current conditions, the multifamily sector is unlikely to play a major role in any economic downturn. High demand, low supply, and construction constraints will mean the fundamentals of multifamily assets remain robust. As the overall housing market cools, cap rates may increase, but overall this asset class will remain healthy.
According to Fannie Mae: “With a recession potentially looming, as well as consumer confidence weakening, it appears that many commercial real estate investors are deciding that future demand for multifamily is a better bet than for other property types, such as office or retail. Indeed, as of May 2022, office and retail cap rates remained well over 100 basis points higher than multifamily cap rates, averaging 6.3 percent and 6.4 percent, respectively.”
Historically speaking, even the severe downside scenario is palatable relative to historical cap rates. Assets with high debt ratios will be most at risk as interest rates will continue to rise in the near term as the Fed attempts to cool inflationary pressures.
Further, certain markets will be more susceptible to a recession than others, according to Redfin. Using home-price volatility, debt-to-income ratios, and home-price growth, Redfin found that the following markets were most at risk:
- Riverside, CA
- Boise, ID
- Cape Coral, FL
- North Port, FL
- Las Vegas, NV
In the end, rising rates will keep more homebuyers on the sidelines, turning them into or keeping them as renters for the time being. New supply is constrained as material prices rise with inflation and regulatory hurdles continue to delay development.
Expert Take: “We now believe the U.S. economy is headed for a mild recession in the coming months…While consumers will continue to spend freely on leisure, travel and hospitality over the summer, a persistently elevated inflation backdrop, surging interest rates and plunging stock prices will erode spending power, severely curtail housing activity and constrain business investment and hiring.”— Greg Daco, chief economist for EY-Parthenon
“At this point in 2022, we don’t see recessionary data as of yet. We have never had an active recession where employment, sales and production levels were positive. It doesn’t exist. We created many jobs in the first half of 2022 and while jobs are a lagging indicator, the other data was positive.” — Logan Mohtashami, Housing Wire
