Experts Predict Recession Likely in 2023 as Fed Continues to Battle Inflation

NEW YORK—A consensus of real estate and finance experts predicted that a recession is likely in 2023 as the Federal Reserve will continue to hike rates this year to battle rising inflation.

The experts were part of a virtual panel discussion held on Sept. 7 hosted by Fordham University’s Real Estate Institute and The Business Council of Westchester (BCW). The panel entitled: “Economic Outlook and Forecasting the New York Region’s Real Estate Market” featured Kathleen Corton, CEO, CIO and managing partner, Hillcrest Finance LLC; Eamonn D’Arcy, professor of International Real Estate, Henley Business School, England; Christopher Deutsch, vice president, China CITIC Bank International Ltd.; Charles Dougherty, vice president and economist, Wells Fargo; Timothy M. Jones, CEO, Robert Martin Co.; and Nicole LaRusso, senior director for research and analysis, U.S. North Region, CBRE Group Inc. The panel was moderated by BCW President and CEO Dr. Marsha Gordon.

Dougherty said that Wells Fargo believes the Federal Reserve will likely raise rates by 150 basis points in the next year and that there is a 60% probability the U.S. will go into recession sometime in 2023.

“Interest rates are going to continue to rise and that’s going to slow down activity across the economy, which is likely to have a big impact on commercial real estate,” said Dougherty. “Higher interest rates are one thing, but when you have demand for commercial properties slow considerably, that is going to slow down rent growth and cut into property valuations.”

Dougherty added a recession is likely in 2023 and will further impact the commercial sector, particularly hospitality in New York City which is waiting for international tourism to come back. “A very strong U.S. dollar coupled with a recession and probably an even more pronounced downturn in Europe is going to have a big impact on New York’s hotel market,” he said.

D’Arcy offered dire predictions on inflation across the Atlantic in Europe, noting, “The Bank of England, in August, was talking about inflation peaking next year at 13%. We’re currently at 10.1% and a prediction from Goldman Sachs suggests we could hit 22%, which is horrendous, by sometime next year.”

Corton, of Hillcrest Finance discussed how different property types are being impacted in the current economic climate. “I look at it two ways—what happens on the revenue side and what has happened with the cost of capital,” Corton said. “For multifamily, rents are up across the board. Very positive news on the top line, but the cost of capital has gone up as well. So, values on multifamily are down, not by a lot, but they’re down. Office values have gone down a lot, and it’s very difficult to refinance. Industrial, fundamentally, is very strong and probably the darling of the capital markets.”

Deutsch, of China CITIC Bank, also is seeing decreasing capital on the debt side, and explained how banks are addressing interest rates and reserves for construction loans. “Banks decrease debt levels by using an interest reserve or calculated interest reserve for a construction project, so they know they’re getting paid over the course of the loan,” he said. “They calculate that reserve and step it up every six months or year, based on their models. Now, we’ve gone from a quarter point to the Fed saying step it up three-quarters of a point. A lot of reserves are being recalculated and borrowers are being asked to fund it … that sucks capital out very quickly.”

The panel also shared insights into remote-work trends and how that is reshaping real estate. CBRE’s LaRusso said that, pre-pandemic, the average office worker spent about 4.2 days a week in the office. Now she expects it will be 3.2 days. “The reduction in time spent in the office, combined with current economic uncertainty and higher costs for occupiers, is going to push back on office demand in the near term,” she said.

In terms of the workers return to the office, the panel seemed to agree that the five-day work week at the office is far off.

Henley Business School professor D’Arcy said that in London, “We’ve discovered people are in the office on Wednesdays, and also Fridays because they like socializing.”

“Understanding the way people are living, working and spending their leisure time is important not just for commercial real estate, but for the way we develop our programs at the Fordham Real Estate Institute,” said Dr. Anthony R. Davidson, dean, Fordham University School of Professional and Continuing Studies. “How we live is changing, and education must continually evolve to meet those changes.”

Those changes also bode well for Westchester, said Gordon, noting that there is “a real opportunity to capitalize on the shifting needs of people and businesses.”

“The hybrid work format presents great growth potential for developers, banks and other businesses in Westchester County to lead the way in ensuring our infrastructure, transportation, working and living spaces are adaptable to the new type of work/lifestyle,” Gordon said.

Jones, of Robert Martin, noted the industrial sector benefitted from the e-commerce boom and multifamily profited from the work-from-home shift. Office and retail/entertainment spaces were heavily impacted, he said, but both are rebounding. “Office space has changed enormously, especially space that people have to commute to,” he said. “Office space in New York City is physically about 40% occupied now. In Westchester, our industrial spaces are fully occupied, but office remains at pre-pandemic levels, which is a relatively stable 20% vacancy level. Retail is doing better, and multifamily continues to be very strong.”

“The good news for Westchester was that many of those who left (NYC) didn’t go far,” said LaRusso. “Many found themselves in Westchester and other parts of the suburban tri-state market. As a region, we did a decent job of holding onto our workforce and we saw that play out a little bit in leasing activity in suburban markets.”

The Hudson Gateway Association of Realtors was a contributing sponsor of the program.