The Federal Reserve's Quest to Cause a Recession: What Will Be the First Casualty?

While the Federal Reserve's efforts to bring about a recession have not yet had a major impact on commercial real estate, there are some indications that the market is weakening, and some concerns about a potential "apocalypse."

A Federal Reserve-induced recession could hurt commercial real estate property values and rents, and ... [+] dramatically slow new construction.getty
A Federal Reserve-induced recession could have a negative impact on commercial real estate property values and rents, and could dramatically slow new construction.

The Federal Reserve's announcement of another interest rate increase is putting more pressure on an already struggling economy. This latest rate hike will make it even more difficult for businesses to recover from the pandemic, and could lead to more job losses and more businesses closing their doors. Commercial real estate has been holding up relatively well so far, but if the economy weakens further, that could change. Cities rely on a healthy commercial real estate market to maintain their economic and fiscal health, so this is a situation to watch closely.

It is clear that the Fed's current course of action is detrimental to the economy, and could lead to a recession. Although Powell's remarks today seemed to suggest a possible change in direction, markets still reacted negatively. This does not bode well for the economy, as it could lead to job losses and decreased demand. Commercial real estate could also be adversely affected.

While there are some signs of life in the commercial real estate market, many experts remain concerned about the long-term impacts of the COVID-19 pandemic. The rise in working from home (WFH) has led to a drop in office occupancy, and it is unclear how permanent these changes will be. The Kastle Office Occupancy barometer, which measures keycard swipes in ten major real estate markets, has been slowly trending upward, but the ten-city average still has not reached 50%.

The Fed's decision to raise interest rates could have a negative impact on the economy, according to some economists. They argue that inflation is being driven by factors outside the Fed's control, such as food and energy price hikes caused by Russia's aggressive war in Ukraine. This could lead to further economic problems down the line.

The Fed's recent slowdown has put downward pressure on office building rents and also thrown a shadow over future office construction. This is bad news for cities, which depend on office work to provide jobs, both directly and for lower-paid workers who provide services like restaurants, security, and cleaning. The office sector also pays taxes, rents to landlords, and interest payments to banks, so a downturn in this sector can have a ripple effect throughout the economy.

The current pressures on commercial offices are worrying to many observers. Some scholars are predicting a commercial real estate "apocalypse," with downward pressure on real estate values and shorter-term leases becoming more common as landlords scramble for tenants. According to one analysis for New York City, this could lead to "long-run office valuations that are 39.18% below pre-pandemic levels," creating a "fiscal doom loop" for city budgets.

While scholars worry about the long-term effects of the pandemic on the economy, the Federal Deposit Insurance Corporation has noted a more immediate concern: the risks posed to banks by large concentrations of commercial real estate loans. Examiners will be paying close attention to new loans and other risks to bank balance sheets, looking for signs of trouble in the CRE market. This increased focus will help protect banks and ensure that they remain stable in the face of challenges posed by the pandemic.

It's good news that there hasn't been a CRE meltdown thus far, but there is still downward pressure on property prices. This is due to the fact that buyers are having difficulty accessing credit at the low interest rates that were once available. As Eliot Kijewski of Cushman and Wakefield points out, this is preventing many potential buyers from entering the market and investing in property.

It's encouraging to see that loan repayments are not collapsing, and that the trend is actually downwards. This is thanks in part to the Mortgage Bankers' Association, who are reporting a slight fall in commercial and multifamily lending delinquencies in the third quarter of this year. This is good news for the economy as a whole, and hopefully this trend will continue.

Although office rents have declined somewhat in recent months, they have not experienced a catastrophic collapse. This has allowed landlords to continue paying their loan charges without major delinquencies. According to CommercialEdge, average office rents in September were down 2.4% from the previous year. However, there is significant variation in rents across different geographic areas and sectors.

There is anecdotal evidence that clients are moving to high-end Class A office space, although they may be moving from existing, less desirable offices. The worry hanging over the sector and over cities is that these older, less modern offices will become vacant and cause problems.

Large New York companies are betting on expensive new Class A offices, according to Jeff Peck of Savills. While this may cause some pain for less affluent tenants in Class B minus buildings, the overall move is positive for the city. These new offices will provide much-needed space for businesses to grow and thrive.

The commercial real estate market is facing a tough problem from the Fed's recessionary policies. Small businesses and non-profits will be forced to contract or close in a recession, reducing demand for office space. Some of those older buildings can be converted into residences, but that process takes time and requires more nimble policies from cities to encourage the transition.

The Fed's actions will bring about a recession, which will cost jobs, businesses, and people's overall well-being. The hardest-hit populations will be low-income and vulnerable workers, as well as Blacks and other minorities.

While we may not be experiencing a commercial real estate "apocalypse" just yet, the Fed's push for a recession means that cities and the commercial office sector are likely to see further declines. This could have a ripple effect on the economy as a whole, so it is important to keep a close eye on the situation.