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Recession fears fail to infect commercial real estate pros

Spencer Levy

Spencer Levy

As the recovery from the 2008 financial crisis evolved into the nation’s longest recorded economic expansion, predicting the next recession’s arrival mutated into something of a fool’s errand.

Spencer Levy, chairman of Americas Research and senior economic advisor at CBRE, joked during a presentation in 2017 that he’d forecasted that a recession was two years out for the past five years. As a result of the often contradictory information regarding the nation’s economic health local commercial real estate professionals say they can’t worry about every twist in the narrative surrounding the arrival of an economic slowdown.

“We pay attention to everything that’s happening in the world, you have to, but we don’t worry about the day-to-day fluctuations,” Matthew Laraway, executive vice president and partner at Hanover-based Chesapeake Real Estate group, said.

But the industry is not immune from the impact of larger economic issues. Jim Caronna, a principal at NAI KLNB, said events in the global economy do impact the industry locally.

Trade wars and tariffs in-particular have roiled Wall Street, stirred uncertainty slowing business investment and created a drag on growth. Most of the negative results of trade disputes with countries like China, he said, have been felt in sectors like steel manufacturing, lumber and agriculture.

Those industries aren’t major players in Maryland’s economy, Caronna said, and as a result the roughly 200 million square feet of industrial and flex space in the Baltimore and Washington region hasn’t suffered a drop in demand.

“At least in the realm of my experience we’re not seeing it dramatically impact leasing or sales at this point in our market places. We still see far more activity on the distribution side than the manufacturing side, but that’s been going on the last 40 years,” Caronna said.

But as 2019 comes to a close there’s a growing list of indicators that the prolonged economic expansion, which started in June 2009, is poised to end.

National Gross Domestic Product, the measure of goods and services provided, is now projected to grow 1.8% between 2018 and 2028, according to the U.S. Bureau of Labor Statistics. That’s the same level the nation produced in the 10-year period starting in 2008.

Financial markets continue to reward investors, but those profits are nearly exclusively the result of strong consumer spending.

Meanwhile business spending is down, the manufacturing sector is already in recession territory, and companies have slowed the pace of hiring.

Matt Laraway (provided photo)

Matt Laraway (provided photo)

Total nonfarm payroll employment increased by 128,000 jobs in October, according to the U.S. Bureau of Labor Statistics. That’s lower than the monthly average this year of 167,000 jobs a month, and substantially beneath last year’s average of 233,000 new jobs a month.

In November, according to payroll processing firm ADP, private sector employment decreased sharply. Companies added 67,000 nonfarm jobs last month. That’s the lowest number of jobs created since May, according to the report, when the private sector added 46,000 jobs.

Service-providing sectors, which include education and health, professional and business, and financial activities sector, added 85,000 jobs in November compared to 138,000 in October, ADP found. The goods-producing sector that includes construction, manufacturing and natural resource collection lost 18,000 jobs after losing 13,000 jobs in October.

Job losses and slowed hiring is bad news for an economy expanding only because of consumer spending. People typically rein in expenditures when they start to worry about job security.

A reduction in consumer spending would acutely impact two commercial real estate sectors on opposite ends of the performance spectrum in recent years.

Maryland’s industrial sector, particularly in areas around Washington and Baltimore, has experienced unprecedented levels of demand and development.

By and large the driver behind the need for industrial space is e-commerce firms that need large warehouses to move products to consumers.

A sluggish economy causing a downturn in consumer spending may mean less buying online, and if the drop in spending is pronounced enough cause a decline in demand for industrial space from e-commerce companies.

Laraway, whose firm has developed some of the region’s most prominent new industrial projects, said consumer spending remains relatively robust, and that he’s confident “there’s plenty of runway left.”

Chesapeake Real Estate Group is still looking for property and new projects, Laraway said, and capital remains accessible for sound projects.

Currently getting entitlements to build projects, he said, provides a bigger obstacle than the economy. But the firm isn’t completely discounting a potential recession’s ability to hinder business.

“Will we be as aggressive as we were in the past? Probably not,” he said.

Retail space, the other commercial real estate sector acutely impacted by declines in consumer spending, has experienced its share of challenges throughout the extended period of economic growth.

Amazon Fullfillment Center TourMF54 copyThe rise of e-commerce has hammered brick and mortar retailers ranging from small shops to one-time cornerstones, such as Sears. Meanwhile, tenants like so-called “doc in a box” clinics, and fast-casual dining spaces that benefit from disruptors like home delivery apps, have picked up some of the slack.

Mike Gioioso, vice president at MacKenzie Retail, said retail tenants range from one extreme to the other in terms of sophistication and how the broader economy impacts business decisions.

Many smaller retailers, he said, are just focusing on what’s “six inches in front of their faces” and “definitely not worrying about the interest rate on a 10 year (Treasury note).”

At the same time, he said, large companies in the sector do make decisions based on broader economic events. A few years ago Canadian furniture seller Structube, he said, was looking to expand into the Washington metro area.

“Because of sabre rattling (over trade disputes between Canada and the U.S.) … they pulled the plug on that expansion,” Gioiso said.

This article is featured in The Daily Record's Doing Business in Maryland 2020.

Full coverage: Bank leaders point to solid business conditions ahead for 2020 | State manufacturers cautiously optimistic despite economic unease | While recession may happen, economists say state will fare OK | Recession fears fail to infect commercial real estate pros

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