The next recession will most likely be triggered by a stock market correction, not a Chinese economic setback or a U.S. trade war or higher interest rates, says CBRE brokerage’s research director Spencer Levy. Speaking to CBRE brokers at their Westfield UTC office, Levy also offered these insights into 2018:
- The new federal tax cuts will stimulate spending at the high- and low-income level and lead to more retail development.
- Local is the new global, as seen by the rise of microbreweries and growing need for health care, industries that can’t be offshored.
- Competition will be won by those with high-value goods, not the lowest-cost goods.
- Agility is the new watchword for 2018.
Here’s the full story:
If CBRE national research director Spencer Levy was hosting the current online sensation, the HQ Trivia game, the make-or-break Question 12 might be: What will trigger the next recession?
(A) A slump in China’s economy; (B) a Trump-induced trade war or (C) a stock market correction.
The answer: C.
Speaking to CBRE brokers and clients Wednesday at the company’s new Westfield UTC offices, Levy said his economists and many others have been annually forecasting a recession in the next two years as the post-recession recovery has extended its life into record territory.
“I said to them recessions don’t start with a whimper, they start with a thud,” he said. “The thud factors are less likely today than they were a year ago.”
A major pullback in China’s economy is not in the offing, he said. Nor is a trade war set off by President Donald Trump’s recent announcement of sanctions against China’s solar s and South Korea’s washing machines in an attempt to reduce the U.S. $550 billion trade deficit
“We have a trade surplus of $250 billion in services with the world and we’re not going to throw that out for a couple of washing machines,” he said.
Another popular cause might be the Federal Reserve’s plan to slowly increase short-term interest rates and choke off liquidity. The 10-year Treasury rate may be the highest since 2016, but Levy said that’s not enough to trigger a downturn
Look out for the ‘black swan’
Instead, Levy cited former Fed Chairman Ben Bernanke’s view that the rapidly rising stock market represents the most likely cause for a recession.
“That would be the black swan I”d be most concerned about,” he said.
But a recession isn’t so bad if it rebalances overpriced assets, such as commercial property, and calms down overeager lenders. The previous recession did not clear the deck as much as in previous downturns because the Fed and Congress rescued failing institutions, and that may explain why it lasted so long, he said.
“Nobody wants a recession, nobody wants people to lose their jobs,” Levy said. “But it’s better than the alternative.”
That would be economic stagnation when business stops spending and investing in anticipation of a downturn.
The upside of tax cuts
Levy praised the recently ed federal tax cuts for adding a new stimulus to high- and low-income spending and predicted retail would attract more investment in response. He said the threat of globalization and offshoring of jobs and businesses is being met by industries that are relatively immune, such as microbreweries and health care.
“People are adapting by forming businesses that cannot be disrupted by globalization,” he said.
When it comes to areas attracting the most high-tech talent, San Diego ranks only 19th out of 50 markets analyzed by CBRE. But Levy said that’s partly because the area’s college graduates are disproportionately tied to biotech and cybersecurity, not computers and programming that underlie the rankings.
“If there were a more complete picture of San Diego graduates, it would rank higher than it does today,” he said.
One area where San Diego comes up short is in foreign investment. Foreign college students are surprisingly important to attracting foreign investment, Levy said. He offered one anecdote in which a Vanderbilt student from the Persian Gulf state of Bahrain convinced his father to buy a $100 million building in Vanderbilt’s home town, Nashville.
“That’s why bringing students here is a bigger driver for you,” he said.
The unspoken advice to the brokers: Cozy up to UC San Diego’s foreign students as a way to get their folks back home to invest here.
Tech companies should locate next to universities
Similarly, he said cities that aggressively promote the relocation of tech companies next to universities is a successful strategy for economic growth.
That argument is one of the bullet points in San Diego State University’s proposal to take over the SDCCU Stadium site, just as the Torrey Pines Mesa has become a mecca for companies feeding off of UCSD’s nearby biomedical research activities.
With a recession inevitable but not necessarily imminent, Levy advised companies to be agile for the next 12 months.
He said industrial developers should focus on smaller-sized builders serving niche businesses, such as beer and marijuana.
Urban-like suburban offices are a good bet, based on millennials moving out of central business districts when their children hit school age.
And retail is a good investment bet because of relatively high capitalization rates.
Factors driving San Diego’s commercial real estate, 2018
(Rankings in parentheses; first place metros)
- Retail, rental growth next five years: San Diego, 1.3 percent (9th); Atlanta, 3.7 percent
- Hotels, international travel demand by market: 16 million (9th); Miami, 58 million
- Life sciences, National Institutes of Health funding: San Diego, $838 million, up 20 percent 2006-16 (8th); Boston/Cambridge, $2.2 billion, up 12.2 percent.
Source: CBRE, “2018 Real Estate Market Outlook”
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