Former US Treasury Secretary: CRE Sector Will Survive The Coming 2023 Recession

Former US Treasury Secretary, Lawrence Summers, reassured CRE CEOs that “if the vehicle’s moving faster, we need a firmer brake, but it doesn’t imply we’ll hit the wall before the car stops” on a day when a stubbornly high inflation rate dashed hopes for a smooth landing for the US economy.

Hessam Nadji, CEO of Marcus & Millichap, conducted a wide-ranging online debate on Tuesday. In it, Summers projected that the Fed’s ongoing rate hikes will soon lead to a “recession of choice” that will end the record-breaking employment creation of the previous year.

Summers stated, “The Fed seeks to limit it by constraining demand by hiking rates. We have constant inflation owing to a conflict between supply and demand. My best judgment is that the economy will enter a recession and that employment creation will slow down in the coming year.”

The economy, and the CRE sector in particular, is far better prepared to survive an economic crisis than it was in 2008 when the housing market crashed, according to the former Treasury director.
Summers said, “We won’t see something like 2008 again,” pointing out how much less indebted homeowners have, how the inventory is not overstocked, and how much stronger and more cautious lenders are now than they were before the sub-prime crisis.

Summers suggested that the recession would not start for a few months since fundamentals like consumer spending are still strong and have some capacity to increase.

“It’s important to keep in mind that there is still a significant savings overhang. According to Summers, $2 trillion was the amount of money that individuals were unable to spend because of the epidemic.
Only $300 billion of the total had been spent; more than half was still in checking accounts. That seems to me that customers will persist. Due to discounted salaries, I don’t believe they will run out of money to spend,” he remarked.

Summers advised CRE participants not to assume that “structural” developments, such as the increase in remote work and the boom in e-commerce, that have been triggered by the epidemic, will have a detrimental influence on the demand for CRE.

Even in a year or two when there is no employment growth, there will be significant ferment and opportunity in the CRE markets, according to Summers.

The former US Treasury Secretary adds “Many individuals believe that working from home will be awful. That is untrue.” According to him, the movement of people into new areas creates a need for real estate. He also said that the pandemic’s quick rise in e-commerce increased the need for warehouses exponentially.

Summers believes hybrid work is here to stay in the office sector, but he does not think it will have the same impact on office footprints as some may anticipate.

Many will travel far away from work as the need to live closer to the workplace lessens. He said employers will become a little more tolerant of workers working from home as they make improvements to their oversight of remote workers.

But if employees work three days a week, the employers will want them to come in on those days, so there won’t be as much of an influence on office footprints, according to Summers.

The former Treasury Secretary made a forecast that is a sweet relief to the commercial real estate industry, stating that CRE, with cap rates presently averaging 5.7% across asset classes, represents an attractive investment option when compared to equities and bonds.

In the upcoming months and years, “the position of CRE in portfolios is going to be bigger,” Summers said.

According to Summers, commercial real estate should have a bigger presence in many portfolios. It is very tax advantageous, and it seems even better after taxes.

“A bond currently yields 3.3 percent, and that is all it will continue to yield after 10 years. Property values are far more likely to increase over ten years. It will rise, not fall.” he continued.