Asset classes poised to thrive as CRE enters recession ‘danger zone’: Moody’s

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U.S. commercial and residential real estate revenue drivers were as strong as expected in the first quarter of 2022, with multifamily and industrial properties doing particularly well — but the rest of this year and 2023 aren’t so certain. , and well-beaten asset classes would likely bear the brunt of an economic downturn while the rich get richer.

The coming quarters will see “an increase in risk … given the tightening of monetary policy and the ongoing Russian-Ukrainian military conflict,” according to a new report from Moody’s Analytics titled Entering the Danger Zone: The Outlook for CRE and Housing.

“We tried to avoid using the ‘R’ word in this paper, but the odds of a recession have indeed increased relative to baseline,” the report said.

Moody’s Analytics now expects a 33% chance of a recession starting this year and a 50% chance of a recession starting in 2023.

Even so, the report says demand for multi-family housing will remain strong for now, especially as house prices and mortgage rates rise, keeping potential buyers in their apartments.

“We expect rent growth to slow from its record pace in 2021, but if the sector pulls off another year where rents increase between 5% and 6%, it will indeed be a good year,” the report said. report.

The industry will also remain strong despite the risk of recession, predicts Moody’s Analytics, but there are headwinds, such as Amazon’s plans to put 10 million square feet of warehouse space on sublease.

Much of the pain of a coming recession will be felt in offices and retail, as it has been since the start of the pandemic, the report predicts.

The report’s authors also suggest that higher mortgage rates, as well as prices that are simply too high – especially for first-time home buyers – will finally dampen housing demand that the pandemic has accelerated. However, the report stops short of calling the housing market a bubble.

“While the demand [for housing] will moderate, it will not completely collapse,” the report said. “There is currently a severe housing shortage… [and] additional supply will not flood the market as it did before the Great Recession.”

The report predicts “moderate” declines in house prices over the next few years.

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