Beware Rising Corporate Debt and Think Long-Term

NEW YORK CITY—Dr. Sam Chandan, chair and associate dean, NYU Schack Institute, and founder of Chandan Economics and Heidi Learner, chief economist at Savills, did not forecast dates of a softening economy. They discussed indicators pointing to economic stability as well as a slowdown. Both cautioned that the levels of rising corporate debt as percent of GDP could trigger a recession.

Learner pointed out that domestic, non-financial corporate debt has reached a historic high at 46.5% and an increasing fraction of investment grade debt is lower quality. She noted that so far this year more retail stores are closing than opening. But she also provided figures showing that corporate profitability and earnings have been stable.

Chandan cited a Wall Street Journal survey that showed people felt a trade war with China was the biggest economic threat to the US. The same data also showed unemployment claims were down and the majority of people surveyed felt the US was either at full employment or close to it.

After reviewing their analyses, the two economists shared the following advice for those in the NNN lease industry at GlobeSt.com’s 17th Annual Net Lease Conference in New York.

Make sure you lock in your tenancy in terms of the length of your financing, making it parallel suggested Learner. “I don’t necessarily see interest rates dramatically rising but it certainly makes sense to the extent that perhaps you have tenants rolling over and you are required to make sure you have anchored your financing,” said Learner. “I think it’s important as ever to do your homework.”

She expressed that she didn’t think there was anything necessarily terribly different this year. But people should still be aware of the competitive landscape regardless of their tenant, she said.

Chandan agreed. He did not forecast the date of a recession. But he reviewed basics for people to prepare for and advance through a downturn. “Lock in your tenancy. Know your property. If you have a large portfolio, take advantage of when the opportunity arises to collect the rent data if you are anticipating more problems may arise,” he said.

However, Chandan reminded the audience that there are significant differences in liquidity across markets. This could affect an ability to refinance. The environments could be different in Boston than in New York. The different property types outside of net lease, and investors and lenders across different metropolitan areas and submarkets can vary tremendously. Some markets would be more challenging than others, he emphasized.

As a final thought to take home, Learner said, “It would be to be mindful that we can’t change demographic trends but financial markets can turn on a dime.”

“The demographic trends that are in place that perhaps underpin your investment are something that should last longer than any cyclical alternative,” she concluded.

For his final takeaway, Chandan pointed to technology and the profound changes in the world such as how we interact with smartphones. “I would strongly encourage folks to be thinking about the extraordinary way we use space. In seven, nine or 10 years when it’s time for you to dispose of an asset, the world will look very different in ways that are relevant for space,” he said.

He commented on how even the views of millennials has evolved. At one time they were described as “25 and homogeneous in terms of preference.” But now, Chandan said millennials are “the most diverse generation in US history.” Millennials certainly have made their mark on how people work and use space.

“There are real changes in the utility and utilization of the spaces that we are investing in,” said Chandan, advising people to think about investing in the long-term.