What a recession could mean for commercial property

By Greg Bell

There’s been a raft of speculation lately that the United States might be heading toward a recession, which experts believe could potentially become a global problem and even hit Australia. While all of this speculation remains just that for the time being, the technical indicators seem to be hinting that it might already be a foregone conclusion.

If a recession does happen to hit, it could potentially create big problems for the Australian commercial property market. Let’s take a look at the data and the repercussions that may follow.

Is Australia heading for a recession?

Two consecutive quarters of negative economic growth means a recession is underway.

As noted by Forbes contributor John Mauldin, compared to other developed economies, Australia has gone the longest without a recession, a whopping 27 years. This indicates Australia was immune to the US recession of 2000 and the global recession of 2008.

However, the ongoing US-China trade war, and locally low employment growth coupled with a slowing in the construction industry are creating conditions conducive for slipping into a recession. It must be noted that the property market performance is not wholly contingent upon GDP and general economic performance.

Still, many experts caution against this fear mongering by noting that both interest rates and mortgage arrears are at record lows.

How a recession would impact the commercial property market

While many of the economic fundamentals remain sound, the possibility for a recession does remain. If this happens, it could cause several things to happen to the commercial property market.

Consumer sentiment will most likely be the first factor to take a hit. The media will jump on even a small slip into negative economic growth, and they’ll pound this story repeatedly. This will cause the public to buy into the hype, leading to people being less likely to make big financial decisions. Companies will delay moving into bigger offices or building new headquarters. Further, a recession will lead to tightening credit.

This in turn will dampen overall property prices, if not make them dip altogether. Lower property values can hurt investor portfolios, but at the same time, they can make for more enticing purchases during auction.

On the other hand, ever-improving reporting and information transfers will enable lenders to respond faster to correct behaviour. From the Reserve Bank of Australia further lowering interest rates to lenders also ensuring they’re not over-leveraged, any economic downturn will be met with swift and decisive action.

How to avoid the worst of a recession

While a recession can create turmoil in every aspect of the economy, the current factors causing all this speculation revolve around non-real estate sectors. Unlike the global recession of 2008, the real estate asset class will not be the main driver of any impending recession.

Although the current chatter amongst the experts and analysts seems to point toward a recession, many industry insiders remain confident that a market correction remains nothing more than media speculation.

Still, as noted, real estate, particularly commercial real estate, will still be vulnerable to any effects from a recession. If this economic downturn does take place, there are options though.

Working with a professional commercial real estate company can help companies and investors navigate the market fluctuations that arise during a recession. While a negative economic growth can create some major problems for the entire country, there are ways to mitigate risk exposure during this time and potentially even use some of the government responses to your advantage.

For information on commercial property investment strategy, contact Ray White.

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