Another Global Recession is Going to Come The ‘Shit is Going Hit The Fan’

Great Recession = Great Depression

Is this a yes or no question? If so, my answer is yes. But I reserve the right to decide what ‘soon’ means, after the fact. Soon means different things to different people and in different contexts. Jesus Christ told his followers that He would be returning ‘soon’. He must be living in a different context.

Here’s what I think, for what it’s worth. Another global recession is going to come. For one thing, that is just the way of things. Our economy is cyclical. For another thing, governments around the world have been profligate. Our economies have become addicted to credit, low interest rates and funny money. There is no way this is going to go on forever. The ‘shit is going hit the fan’ soon, and when it does, no one will be untouched. I just can't say, in advance, what ‘soon’ means.

How will the global markets affect property performance in the United States?

The global economy held up the BRICs (Brazil, Russia, India and China) countries as the star growth markets for many years. Today, it is just the ICs (India and China) that are poised for economic growth, and those look pretty “icky” now too, as China growth prospects decelerate and India works through reform challenges. There will be bumps in the road, but longer-term several of these emerging markets still present strong growth opportunities for companies and real estate.

Developed markets outside the U.S. may be more important to watch right now: Japan is in a recession, Europe is fighting deflationary pressures, and elections in Greece could rekindle the crisis there and threaten the stability for the Euro. Even with some near term global economic uncertainty, there remains a ton of capital chasing commercial real estate, and the U.S is the focus for much of it due to a comparably more stable growth outlook, its “safe haven” position, and the need for foreign capital sources to increase real estate exposure and diversify from their home markets.

What are the greatest risks to commercial real estate investment on the horizon?

There are a lot of factors at play including economic growth, deflation, geopolitics and the list goes on which could all lead to greater volatility. The headlines these days can make your head spin. Cutting through it all, in my opinion one of the one of the key issues is still the ability of monetary policy makers to navigate this environment without spooking the countries that still need support or stoking a bubble or inflation.

Divergent growth prospects and divergent monetary policy can create volatility in financial and currency markets. The Fed seems set on starting the process of normalizing interest rates in 2015, but the markets are not buying what the Fed is selling right now in terms of the rate outlook. Ten-year Treasury yields have again dipped to the 2 percent range. Either way, historically expansions last several more years once the process of interest rate increases begins, and the positive yield spread also suggests more room to run. We’re betting on that, but no doubt the ride will be bumpy as it has been as 2015 starts in financial markets, and getting out of the great monetary experiment will be more challenging than it was getting in.


World map: Property reccession (image)

Slower global economic growth, geopolitics, deflation, and monetary policy present key risks

Could the U.S. economy face the “r-word” in the short-term?

Just about all of the leading economic indicators in the U.S. are at recovery-to-date highs and despite talk of tightening next year policy is still incredibly accommodative, so that points to solid growth in the short term. We are already technically over 5 years into this expansion cycle though, and the good times don’t usually last forever. The last few economic expansions lasted an average of 7-8 years, so that length would put us somewhere in 2017 or 2018.

So in the medium term, some correction is likely on the horizon. Will it be a full economic recession? It could be. Something would have to trigger it such as more advanced monetary tightening, an asset bubble popping, or maybe a significant escalation of one of the many geopolitical conflicts percolating right now around the world. Also, by 2016 and 2017 there could be a bigger construction delivery pipeline hitting the market as the cycle ages. Overall we expect growth for at least another two to three years; but watch for 2017 or 2018.

What does this all mean for real estate investors?

We are in the sweet spot in the cycle for NOI growth, and real estate is a favored asset class globally, a good time for owners to make hay while the sun shines. The next few years should be great for harvesting returns and for strategic dispositions. But with pricing increasing ahead of fundamentals, and continued tremendous competition for core assets, many investors looking to place capital are challenged and have been pushed out the risk spectrum to find acceptable returns.

I’d be thinking about development in some segments, investing in higher risk assets where you feel good about being able to add the value in the next 2-3 years and exit, or else finding assets that can ride positive longer term secular trends and that you don’t mind holding through a cycle and owning 10 years from now.

So, I recommend planning for the inevitable. Here are a few specific suggestions.

Build an emergency fund. Try to save enough to cover your basic living expenses for half a year. You might have to adjust your life style to do this. Giving up vacations and treats and dinners out is the price you might have to pay for some financial security in the future.
Pay down debt. make this a family mission. Do it as fast as possible. Debt restricts and encumbers you. If times get tough, it will become a major burden. Without a lot of debt, your whole situation will be more flexible.
Learn skills that will be worth something in good times and bad. The more skills you have, the less you will have to spend to hire someone else to do things for you. It is remarkably easy to gain basic proficiency in many trades if you make it a priority to do so.
Take advantage of basic demographics. There are a whole lot of people in my age group who have cash in the bank, a limited future life time and a need for services of many kinds to make our lives more comfortable. Focus on acquiring the skills to service this demographic. Begin today to develope relationships with older people. If they are used to being able to rely on you for help in good times, they will automaticly turn to you in bad times.
Make a plan for how you and your family will deal with the situation if you or your wife lose your job. Assume that finding a new job may be very difficult. Planning now will give you time to do things you might not be able to do on the spur of the moment if there is a major crash in the world economy. Maybe you could start today to develope an alternate source of income. Remember what I said about acquiring skills.
Build and protect relationships. Good relations with family, friends and neighbors will help you a lot if there is an economic crash. People working together can accomplish much more than they can separately. This is probably the most important piece of advice I can offer. Stick together. Get used to working together.




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