When the Music Stops

Are we headed for a recession? Are we already in one? And if so, how steep and rough the landing?

Hard to say this time around.

Yes, interest rates are way up along with the cost of, well, everything. But recessions historically go hand-in-hand with job losses and that just ain’t happening in most industries. (Mortgage lenders are certainly one exception).

So while the GDP may be declining, the country is nearly fully employed at record salary levels. That’s not standard recession protocol but these are strange times. Especially so for community bank and credit union executives trying to make portfolio decisions for the next decade and beyond. To quote The Clash a decade ago … “Should I Stay or Should I Go?”

Move Along, Nothing to See Here

Now if you’re still looking for a clear signal that a recession is around the corner, I recommend you not to look to the commercial real estate industry as an economic indicator.

That’s because history tells us that the commercial real estate industry tends to lag well behind the rest of the economy when it comes to both recessions and recovery.

By this I mean that when recessions are finally deemed “official,” it often takes a full quarter (or more) before the institutional side of the real estate industry reacts. That is, commercial property values and lease rates tend to remain fairly level long after residential housing and stock prices have corrected.

And the same holds true when the economy has once again turned bullish. Rather than shoot back up a` la residential prices, commercial property values and lease rates tend to creep, rather than spike, upward.

The result of this “industry lag” can be vexing for credit union executives trying to assess their portfolios and overall growth plans during times of impending recession and/or rumors of recovery.

Real Estate. Is. Local.

But wait, that’s not all.

It gets even more confusing when I speak with key stakeholders in places like greater Phoenix, Charlotte and Nashville who tell me that they’re not having any problems achieving higher sale and lease prices while other regions of the country are still struggling with below average prices/rates — especially in the corporate office segment. (Never mind industrial properties which remain off-the-charts expensive from coast-to-coast).

So, taking the pulse of which markets are right for portfolio expansion can feel like investment “whack-a-mole” to many. But rather than simply stick a finger in the air to get a sense of which way the real estate winds are blowing, (thank you Bob Dylan), I’ll offer two suggestions.

One, be wary of most commercial brokers urging you to make fast “buy or lease now” decisions. That’s because brokers basically only divide what they conquer. I know that sounds harsh but it’s true. So, even though a deal may not be optimal for their client, it’s still a deal with a commission. In other words, don’t take the bait. Be wary and don’t be pressured.

Second, be fully informed. For our clients, we help make sure of this by developing deep-dive financial modeling scenarios driven by the power of our proprietary market research platform, Rubicon Reveal. (Not going into a commercial here, but clients have told us it’s a game changer).

My point here is that tools exist that enable banking leaders to receive and review clear and defendable information that puts them in a position of strength. Real-time information that melds with their long term-growth plans and ideal future membership vision.

When we develop our recommendations using Rubicon Reveal, the result is a well-informed set of scenarios based on historical data, current market-by-market demographics and future-focused economic models.

It’s Got a Good Beat, But …

It’s easy to do the happy dance during strong economic times when the band is great and everybody’s having a blast at the party. But when the music stops and the crowd thins out, things aren’t nearly as festive.

But the good news is that a lot great music exists that is deep and thoughtful. And when you sit back and let them sink in, the messages can be resounding and the results both moving and memorable. Just don’t get caught up in the foot stomping drum beat: Listen closely to the lyrics — i.e., the research results — and to what they are really telling you.