Shaken, Not Stirred

Episode Summary

Executive Summary: The episode opens with a light discussion of personal updates and Moody’s Analytics winning a forecast accuracy award, then pivots to a deep dive with CBRE’s Richard Barkham on the U.S. economy and commercial real estate. The main takeaway is cautious optimism: recession risk has risen, but real estate fundamentals remain broadly resilient, with the biggest vulnerabilities in industrial and retail tied to tariffs, uncertainty, and slower leasing.

Main Topics: Moody’s Analytics forecast accuracy award (Priority: 5/5): Mark Zandi, Marissa Di Natale, and Chris discussed Moody’s Analytics winning an award for the most accurate U.S. GDP and CPI forecasts over a rolling two-year period, attributing success to process, team expertise, and some luck. Recession odds and macro uncertainty (Priority: 5/5): The panel and Richard Barkham debated recession probability in the U.S., with risks elevated by tariffs, trade war uncertainty, and slower confidence, but with current data still holding up enough to avoid calling a recession as the baseline. Tariffs, trade disruption, and growth slowdown (Priority: 5/5): Barkham argued that tariffs and uncertainty are already hurting sentiment and may push the economy toward stagnation in the second half of the year, especially if trade negotiations do not improve. Commercial real estate sector exposure (Priority: 4/5): The discussion identified industrial/logistics and retail as the CRE property types most exposed to trade tensions, while apartments were described as strong and office as challenged but still manageable overall. Office distress, refinancing, and extend-and-pretend (Priority: 4/5): The conversation examined office obsolescence, refinancing pressures, and whether banks will continue to extend loans. Barkham sees more restructuring and repurposing ahead, but not a systemic credit crunch absent a severe downturn. Capital flows, cap rates, and investor behavior (Priority: 3/5): The group discussed whether foreign capital is retreating from U.S. real estate. Barkham said investors are on the sidelines due to uncertainty, but domestic private capital remains active and cap rates have been relatively stable.

Key Arguments: Moody’s Analytics’ forecast award likely reflected its refusal to add a recession to the forecast during 2023-24 when many others did, plus a disciplined forecasting process and specialized team coverage. A surge in immigration helped the U.S. avoid recession by increasing labor supply, easing wage pressure, and allowing the Fed to slow or avoid even tighter rate hikes. Despite tariff shocks and falling confidence, real-time indicators like spending and travel still do not clearly show recession, though the second half of the year could slow sharply. The industrial/logistics CRE segment is vulnerable because leasing has slowed and some occupiers overexpanded during the pandemic; retail is also exposed as tenants become cautious. Office remains the biggest problem area in CRE due to structurally high vacancy and functional obsolescence, but the issue is likely to be resolved gradually over many years, not in a sudden collapse. Banks are still lending to real estate and are likely to continue extending and restructuring loans as long as properties can service debt, reducing the chance of a doom loop. Foreign investor demand has paused because of uncertainty, but weaker dollar conditions could eventually attract overseas buyers; meanwhile, domestic private capital may fill the gap. Cap rates have not yet reacted dramatically to recent turmoil because they tend to lag market conditions and are influenced by treasury yields and broader financing conditions.

Data Points: U.S. forecast accuracy award period: 24 months - Moody’s Analytics won for the most accurate U.S. GDP and CPI forecast over a rolling two-year period, Jan. 2023 through Dec. 2024. Prior U.S. award win: 2018 - The hosts said the last time Moody’s Analytics won this U.S. forecast award was in 2018. Marissa’s hobby: pickleball - She said she is taking a break from Pacific Ocean paddling after seven years and has taken up pickleball. Forecast team size: 600-700 people - Barkham said CBRE’s global research team ranges from about 600 to 700 people. Professional economists at CBRE: about 20 - He noted that within the research team, roughly 20 are professional economists. Recession probability (Barkham): 50/50 - He said the U.S. recession odds for the second half are about evenly balanced. Recession probability (Chris): 55% - Chris said he raised his recession probability estimate to 55% because trade talks are not improving. Recession probability (Marissa): 60% - Marissa said she is sticking with a 60% recession probability. Recession probability (Mark): 60% - Mark said he is also at 60%. Immigration surge in 2023: about 3 million people - Mark estimated immigration reached about 3 million in 2023, versus a typical 1 million. Typical annual immigration: about 1 million - Mark contrasted the surge with normal immigration levels. Retail vacancy rate: about 4.5% - Barkham said retail vacancy is very low, reflecting limited new retail construction over 15 years. Industrial vacancy rate: about 7% - Barkham used industrial vacancy as a comparison point for retail and office. Office vacancy rate change: 12% to 19% - He said office vacancy has risen materially over the last several years. Office sector share of commercial real estate: 25% - Barkham said office is only about a quarter of overall commercial real estate. Real estate value decline since 2022: 20-25% - He said higher interest rates in 2022 led to this drop in values. Real estate lending spreads: 150 basis points - He said spreads on real estate lending are around 150 bps. Recent spread widening: 10-15 basis points - He said spreads have moved only modestly since the trade war erupted. All-in debt cost for prime real estate: below 6% - He said financing remains competitive for prime grade real estate. Top 50 banks provisions: $150 billion - Mark noted that the top 50 banks have provisioned this amount against losses on securities over the past 24 months. Potential office stock needing repurpose/teardown: 10-15% - Chris asked about obsolete office stock, and Barkham estimated this share will need repurposing or demolition. Potential conversion timeline: 15-20 years - Barkham said working through obsolete office stock could take two cycles and roughly two decades. Current 10-year Treasury yield: 4.3% - Barkham said the 10-year was around this level when discussing cap rates and valuations. Threshold for further CRE value pressure: above 4.5% - He suggested cap rates and property values could face further pressure if the 10-year rises above this level. Probability of regional-bank problems in severe downturn: 10-15% - Barkham said a severe recession and unemployment spike could create issues for community and regional banks, but he viewed this as low probability.

Pivotal Quotes: "we're not in recession yet" — Richard Barkham: Barkham’s early assessment of the U.S. macroeconomy and real-time indicators. "the majority of us commercial real estate can continue to service those loans, augurs well" — Richard Barkham: His view on why CRE is unlikely to trigger a banking crisis absent a severe downturn. "the future revolves around the tariffs" — Chris Terides: Chris emphasized tariffs as the key uncertainty for the 2025 forecasting environment.

Implications: The U.S. economy may avoid recession, but tariffs and uncertainty raise the odds of a sharp slowdown. CRE is not in a doom loop, yet industrial, retail, and obsolete office assets remain the most exposed, and loan workouts may stretch over years.