If the economy falls into a recession, property values could take a major hit according to a new study. Cushman & Wakefield’s economic forecast looks at various scenarios and implications. A drop in values could have repercussions on property assessments and tax bills.
In the baseline assumption for a mild recession in the fourth quarter of this year or early 2023, the brokerage estimates property values could decline by 20% over the next two years, ranging from 4% to 23%, depending on product type.
"The mild recession scenario shows that net operating income decelerates across all product types but remains positive in all cases except for office," the report states. "Also, it is worth noting although NOI slows, it remains far more resilient relative to past recessions, such as 2001, 2009 and 2020."
A scenario in which inflation comes down and the Federal Reserve eases back on rate hikes sooner than expected is just as likely as stagflation, which would result in a deep recession in 2024 and property value declines of over 30%.
A soft-landing outcome has GDP slowing to 2% this year and in 2023, and property values recovering their peak value by 2026.
"Given all the macroeconomic uncertainty — supply chain issues, inflationary pressures, Fed rate hikes, waning consumer confidence and many other headwinds — the No. 1 question we get from clients these days is, 'How will the shifting environment affect commercial real estate?'" Cushman & Wakefield Chief Economist Kevin Thorpe said in a video discussing the findings.
Nuances like sector, geography, and product quality all matter. Since all real estate is intensely local, not every product type/geography will follow national trends; many assets will outperform.
The report emphasizes that market volatility can create opportunity. Now is precisely the time to revisit real estate portfolio tax strategies to be in the best position for whatever may occur.