WASHINGTON, DC-Eighteen months into a credit freeze, the real estate industry hardly needs an official proclamation that the economy has gone into recession. Still, though, CRE–along with the rest of the nation–got one yesterday when the National Bureau of Economic Research–a private body whose sole mission is to call both the beginning and the end of a recession–announced the downturn’s official arrival as last December. Wall Street, as it has regularly done for the last two months or so, responded with a huge–in this case 679-point–drop.
The current downturn does not meet the official definition of a recession–two consecutive quarters of declining growth. GDP fell 0.5% in the third quarter this year; in Q2, GDP growth registered 2.8%. Still, though, the NBER noted that the economy met another definition of a recession: “a significant decline in economic activity spread across the economy, lasting more than a few months.”
The commercial real estate industry can attest first hand to that–it has been watching its residential counterpart struggle with both sales and financing for the last two years. Indeed, the widespread and–in most cases, careless–securitization of subprime loans is one of the origins of the crisis. CRE began to be directly impacted last August when the CMBS markets shut down. It also received a wake-up call in March when Bear Sterns was acquired by JP Morgan Chase in a Treasury Department-engineered buyout.
With this hard-earned history behind it, news of an official recession “is merely a recognition of what everyone in the commercial real estate industry has known for some time,” John St. Jeanos–a New York-based commercial real estate attorney at Herrick, Feinstein LLP, with a sub-specialty in finance–tells GlobeSt.com. “This is simply the retrospective interpretation of the empirical evidence that is needed to make official what has been patently obvious for many months.”
“The fact that we are in a recession is nothing more than a confirmation of what the commercial real estate industry has known and how the industry has acted for most of 2008,” Barbara Trachtenberg, a partner in DLA Piper’s Real Estate practice in Boston and president-elect of NEWIRE (New England Women in Real Estate), tells GlobeSt.com.
She points out, “The only part of this information that is new is that it provides a starting point for the recession–December, 2007. For optimists using history as their guide, that means the end is near–probably within six months, which means that we have passed the halfway point. For others who take the view that this will be a longer than average recession, it simply means that we are almost one year through the pain.”
More important to the CRE industry is not the question of what, but when–as in: When will the credit markets unlock?
For his part, St. Jeanos doesn’t “envision much of an effect on liquidity in the commercial real estate market, nor do the majority of the firm’s developer clients, whom I counsel on finance issues. An aura of impending recession, or a real-time sense that we are in a recession, affects the credit markets far more than an official proclamation of the obvious: that we have been in an economic recession for months now.”
Trachtenberg says she doubts that lenders will suddenly become optimists, assume that the end of the recession is near and start the dollars flowing again. “However, I also don’t think that this news is going to significantly tighten underwriting standards or significantly reduce the amount of deal flow from its current levels. My view is that the existence of the recession has already been taken into account.”Indeed, the CRE industry has absorbed far more in the last few months than the mere fact of a recession. For example: