Recession Coming says RCLCO Survey

HOUSTON – (By Dale King, Realty News Report) – The real estate market is heading down a rocky road and the economy is bound for a recession, according to a RCLCO survey of real estate professionals.

RCLCO, a consulting firm with 55 years of experience helping clients make strategic, effective and enduring decisions about the real estate market, says its just-released semi-annual Market Sentiment Index predicts a recession is definitely on its way.

“The RCLCO Current Real Estate Market Sentiment Index (RMI), which measures sentiment on a 100-point scale, has decreased 47.0 points over the past six months, from 82.1 at year-end 2021 to 35.1 at mid-year 2022 — just slightly above the level of 30 which typically coincides with periods of real estate market distress/recession,” said RCLCO Managing Director Charlie Hewlett during the seminar carried online Tuesday.

“Respondents predict that real estate market conditions will continue to deteriorate over the next 12 months, with the future RMI dropping 10.2 points to 24.9. This would bring sentiment into market distress/recession territory,” he added.

“Just over half of survey respondents (58 percent) believe real estate conditions will get moderately or significantly worse in the next 12 months.”

And he went on: “Almost all respondents (92 percent) believe there will be a recession within the next two years, with 54 percent believing it will occur in the next 12 months, and 38 percent believing it will occur 13-24 months from now.”

The RCLCO report offers the following summation of a recessionary prognostication:

“This drop comes during persistent inflation, geopolitical instability and ongoing issues relating to the supply chain and soaring energy prices. Mortgage rates have surpassed 5.0 percent, their highest level since 2009, which has begun to put a damper on the previously resilient for-sale housing market.”

“Growing inflation continues to eat into consumer spending power, and the Fed’s monetary policies aimed at curbing inflation are simultaneously threatening to tip the economy into contraction – all factors that prompted survey respondents to predict a recession occurring at some point over the next two years.”

RCLCO’s semiannual Mid-Year RMI analysis was outlined during a 45-minute webinar that featured comments from Hewlett, who has more than 25 years of experience in real estate, and Cyndi Thomas, managing director at RCLCO Fund Advisors where she focuses on driving the performance of asset plans for various pension fund clients.

Kelly Mangold,
Principal, RCLCO

The moderator was Kelly Mangold, a principal based in RCLCO’s Bethesda, Md., office who collaborates with clients in the public and private sectors to guide development and planning decisions.

Opening the computer-streamed event, Mangold prepared the audience for what was coming by saying “the first six months of 2022 were tumultuous,” roiled by rising mortgage interest rates, supply chain woes, continuing war in Ukraine and subtle increases in the appearance of COVID though without hikes in deaths or hospitalizations.

Hewlett tempered the tone later by offering a list “of things we should feel good about,” mainly touching on strengths in job numbers. Among his feel-good observations were:

Employers added 390,000 jobs in May
Total of 2.4 million jobs added in 2022
April payrolls revised upward by 4,000 jobs.
Wage growth “moderated in May, but is still hot”
Labor force participation levels up to 62.3 percent

But he couldn’t avoid the “things that make us nervous,” such as the highest inflation rates in 40 years, 3.9 percent hike in the cost of energy and a year-over-year increase of 10.1 percent in food costs – the worst 12-month climb since 1981.

The RCLCO managing director also explained how those who toil in the real estate market assessed segments of the business. A page-long graph indicated that survey respondents feel the market for second homes, for-sale houses and land are past peak while the condominium market sits on the line between peak and past-peak.

Multi-family homes, age-restricted communities and senior housing have hit peak, those responding said. Survey takers said rental housing is still firmly in expansion mode, but more respondents believe this sector had moved from the early to late stable phase, indicating that the apartment sector may be approaching a peak.

There was much less consensus surrounding the cycle stage of the commercial real estate sectors. Many felt that hospitality and industrial were in the stable phases of the cycle, while there was wide variation in retail and office with respondents all over the map from early downturn to early recovery, early stable, and even late stable, perhaps reflecting the high level of uncertainty in the overall economy.

Gasoline prices, Hewlett said, are registering a double whammy. They are higher than they have ever been and reflect a consumer sentiment that’s about as low as it gets.

One slide in the webinar summed up other key takeaways in the report.

Despite potential recession over the next 24 months, some real estate sectors should outperform during the coming five to 10 years:

Rental housing – Job growth and high housing prices will keep rental demand high, although supply is ramping up.
Industrial – Demand should stay very strong as e-commerce continues to expand and build out its supply chain.
Niche sectors – Health care (medical office, life sciences, senior housing), data centers and self-storage have strong long-term demand drivers, but often require specialized investment and management expertise.
Caution is recommended for office (flight to quality) and retail (flight to necessity), as structural shifts are ongoing, creating greater uncertainty.
Upcoming slowdown will likely create investment opportunities, widespread distress is unlikely.

Looking ahead, says the RCLCO report, most respondents expect interest rates and cap rates to rise. Respondents were split about inflation – with a mix of opinions if it would decrease or increase in the coming year, but with more expecting elevated levels of inflation over the coming year by about a 2-1 margin. Overall respondents felt capital flows to real estate and homeownership rates would fall, perhaps consistent with the pessimistic outlook for the economy.

Thomas concluded the webinar with a brief “snapshot” of a new addition called ESG.

About 38 percent of respondents have some form of an ESG (environmental, social and governance) policy in place. Of those, some 75 percent have an identified “champion” for ESG initiatives at the leadership level.
A significantly larger share (55 to 61 percent) of firms who utilize public or institutional capital sources have ESG initiatives than those who do not.
The top three reasons for exploration or adoption of ESG-related policies, in order of importance, are: Alignment with company values, positive community impact and part of fiduciary duty.

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