Inflation, Cap Rates, The Fed... Are We Headed For Recession?
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Inflation, Cap Rates, The Fed… Are We Headed For Recession? Interview w/ John Chang

John Chang is the National Director of Research at Marcus & Millichap, one of the largest CRE brokerages in the country. John goes deep into the state of our economy, dissecting how the Fed’s response to circumstances will impact trends, how cap rates are or aren’t correlated to interest rates, and why US real estate is attractive to global investors. John shares his wealth of information from their firm’s deep research data. As a bonus, John shares his thoughts on whether we’ll have a recession, and the best and worst places to invest right now. This is a must listen episode.

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Inflation, Cap Rates, The Fed… Are We Headed For Recession? Interview w/ John Chang

We’ve got a special episode for you. This was an interview with John Chang who’s the Senior Vice President and the National Director of Research at Marcus & Millichap. He dropped some major bombs.

This was so good. There is so much information this guy is giving. The way to make money in the investment world is you’ve got to know what the tides are doing. When the tides are going in, all boats float. If tides are going out, all boats sink. You’ve got to know what the tides are doing. John Chang and Marcus & Millichap are the heavyweights in the industry and he is the Head of Research. He unloaded major data on are we going to have a recession, what’s the future of inflation, what’s likely with Fed rates and how does it affect real estate? This is a must-read.

Probably multiple times. I’m already thinking, “I’ve got to go back and read this.”

Get ready for this. Enjoy.

We have a special guest, John Chang, who is the Senior Vice President at Marcus & Millichap. If you are not familiar with Marcus & Millichap, they are a heavyweight in the real estate space, doing a lot of economic and real estate analysis as well as a brokerage. John, give us a little bit of context for your background and Marcus & Millichap. Thanks for coming to the show.

Sure, thank you. I’m happy to be here. Marcus & Millichap is one of the leading commercial real estate brokerage firms. We have over 2,000 agents across the country. We’re in the US and Canada and every major city. Our core job is to help investors buy and sell commercial real estate. We also help with financing. My job is to run our research services team. Our focus is on gathering and synthesizing all the different types of data that are out there. We smash them together and try to translate them into something useful to help investors make decisions.

It’s so great that you guys are doing this. There are a lot of brokerages out there but you guys are very much data-driven and research-driven, which I love. As investors, we’re going to do a lot better when we know the currents and the tides that are in place. I love the emphasis there.

One of the reasons why I get you on the show is at your level, you’re seeing so much data and you’re aggregating this all. You’re seeing the big shifts that are happening, so we’re super excited to dive into it. There’s a lot to talk about.

We were on a panel together debating economics at the Best Ever Conference. That was a lot of fun. Unfortunately, you won but it was well fought. Talk about the big picture of what’s happening right now. Give us the broadest strokes on what are the things that are going on right now that are the most important?

The top thing in the news is inflation. We saw that going up and we got some new numbers. Headline inflation is up to 8.5%. There are a lot of factors that fed into that. The cost of everything is rising quickly but the real impact is what the Fed is going to do about it and what they’ve already started to do about it. That’s going to have a direct impact on commercial real estate and commercial real estate investing as the Fed puts upward pressure on interest rates. We see a lot of conversation about these headwinds, inflation and rising interest rates. There is a lot of talk about a recession.

ILB 32 | Headed For Recession
Headed For Recession: The cost of everything is rising quickly, but the real impact is what the Fed is going to do about inflation and what they’ve already started to do about it.

I have to remind people that we’ve added 1.7 million jobs in the first quarter of 2022. That’s the second strongest first quarter on record. If you look at retail sales, they are up 10% on a year-over-year basis with the inflation adjusted. You look back and it’s 15% above where we were before the pandemic and before all of this slowdown of the economy happened. We have to keep things in mind. We have to gather all the facts. We have inflation and rising interest rates. It is going to weigh on the economic growth, but we still have a lot of forces that are driving the economy forward. It’s not all bad, even when the news starts to get negative.

I completely concur. The data I’ve seen shows a 20% increase in household net worth since the beginning of 2020 and a 15% increase in household net income since the beginning of 2020. Consumer demand is strong and the job market is on fire. We’ve seen wage growth strongly. It’s hard for me to imagine a recession happening now in GDP even though I know one of the yield curves is inverted.

I’m with you. You see the headwinds but you see the tail ends too. What’s going to win? Here you see inflation, which is magic for commercial real estate. It’s a massive tailwind but then you see Fed rates. How do you think it plays out? Give us the bottom line of which wins? Does inflation win and prices go up? Do the Feds win and the prices go down?

I don’t necessarily know if either of those is the real winner. Nobody wants to see the numbers where they are and where they’re going. Inflation has a negative impact on the psyche of people. If you go out to a restaurant or the grocery store to buy something, it’s more expensive today than it was a year ago. We have to remember that from a commercial real estate and investment real estate perspective, inflation is not the enemy. It is helping to push up the rents and it helps to drive income growth.

Real estate is one of the best places to be invested during an inflation cycle because it is able to keep up with that inflation, at least to a degree. Certain property types are better at this than others. If you look at apartments, self-storage and hotels, they all adjust their rents, whether it’s daily, monthly or annually. They are able to capture that inflationary pressure as opposed to many other types of businesses and investments. Even some of the long-term lease product types like single-tenant, retail centers or office buildings still have some inflation resistance.

One of the key things driving up inflation is construction costs. We have 8.5% inflation right now, but construction costs are climbing to 17.5%. That means that the underlying value of the building is rising faster because you can’t replace it as easily. You’re going to get a lift across all the different types of commercial real estate. That high construction cost is going to reduce the amount of construction that we see out there. It’s already being curtailed and that reduces your supply risk, which in turn helps support your occupancy levels. Overall, if you look at it as an economist or as an average citizen, inflation is not good. As a real estate investor, I don’t want to necessarily say it’s a good thing but it’s not a bad thing.

What is your perspective on inflation and where does it go from here? Does it keep going up? Does it go down? We were looking at the CPI numbers and from our analysis, the two biggest changes were fuel and automobiles.

It’s clearly a supply chain issue and then a temporary political issue. It’s not necessarily sustainable but clearly worrisome. What’s your take on inflation in the next 24 to 36 months?

As we came into the inflation cycle, the Fed kept saying, “This is temporary. It’s going to go down. It is supply chain-related.” They shifted their stance and said, “It’s a little worse than we thought. It’s going to be longer than we thought.” They are still saying, “By the second half of 2022, we should have this back under control.” That might be a little optimistic. If you look at the underlying drivers, you have wage growth at about 5.5%, energies up 32% on a year-over-year basis, home prices are up to 15.5%, and construction is 17.5%. Producer Price Index came out and it’s up 11.2% on a year-over-year basis. That’s a big number.

Producer Price Index is the cost of everything that’s going into the manufacturing as inputs. That means that the PPI is leading that inflationary trend and it’s still on the rise. It’s saying, “The products that are being sold 3 or 6 months from now when they get them being manufactured and out to market are going to be higher in their costs.” For inflation, we didn’t wrap that up in 2022. We still see a lot of pressure there. As it carries into 2023, we’re going to start to see things flatten out later in 2022, but it’s going to be a while to get this thing back down.

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The Fed is being aggressive. The Fed notes came out and they were talking seriously about a 50 basis point increase in March. They backed off of that because of what’s happening in Ukraine. We can expect that there will be a couple of 50 basis point bumps in 2022 in the Federal funds rate. By the end of 2022, we can expect the Fed’s funds rate to be up 1.5% to 2.5% higher than it is now. That’s going to put upward pressure on short-term rates. The Fed has a tough job but you have to put this in perspective. More than 40 years ago when inflation was super high, Paul Volcker came in and pushed the Fed funds rate up by 10% in six months. This can all change.

That’s why I want to laugh when you say that he’s being super aggressive. I was like we might hit 2.5%. With the inflation this much, are you kidding me? It’s like, “I’m going to throw some drops of water on this fire and not go in a lot.” It’s a joke. It is going to have an impact but it’s still not that material, in my estimation.

Real rates will still be massively negative.

The other thing the Fed is going to do is they stacked up against their balance sheet. During the pandemic, they increased their balance sheet from $4.4 trillion and they went up to $8.8 trillion. In the Fed meeting notes, they did say that they were going to start using quantitative tightening and started selling off stuff on their balance sheet. That’s going to push that long-term rate.

That could be dramatic. What’s the construction of that balance sheet? Is it primarily mortgages? Is it treasuries? Is it a mix?

It’s a mix. It’s long-term treasuries, some short-term treasuries, and a lot of mortgage-backed securities. We’re using quantitative easing to hold the rates down. Now, they’re going to flip that. They’re going to push up the interest rates.

We’re already seeing big adjustments in the mortgage rates right now. I’m looking and shopping around. Rates are up already by 2%.

In 90 days, it has gone up to a 70% increase in rates. That’s definitely going to put a chill on things.

They’re going to keep going. They have to raise those rates up in order to slow down the inflationary pressure. They have to take out the liquidity in the marketplace. If you go back to 2021 and the flood of capital coming into commercial real estate, it was a record-breaking transactional year in the commercial real estate space.

There’s so much money looking for yield and that pushed those cap rates down. There was so much money out there and it’s still there. It’s still aggressively competing for deals and we’ve seen that through the first quarter. It’s still carrying into the second quarter. We’re starting to see a little bit more pushback in the marketplace from the buyers because their cost of capital is going up and it’s causing a little bit of expectation gap between buyers and sellers, but it’s not problematic yet.

ILB 32 | Headed For Recession
Headed For Recession: We have inflation, we have rising interest rates. It is going to weigh on economic growth, but we still have a lot of forces that are driving the economy forward. And so it’s not all bad, even when the news starts to really get negative.

Let’s say the Fed raises rates to 2.5% by the end of 2022 and mortgage rates and lending rates are 4% or 5%, maybe 6%, but inflation is still 8.5%. As you point out, it’s probably going to be in that range or close at the end of 2022. It’s still negative real interest rates. It makes a lot of sense to borrow that money and invest it in multifamily, for example, because the property price grows. The Fed is a little late here and they seem to be getting aggressive, although as you point out, they’re not Volker yet. It’s still going to be a positive environment in my book for real estate. No one likes inflation but as a real estate investor, I’m okay with it.

All I do is read about this stuff all day every day. I saw an article produced by a major brokerage firm saying, “For your retirement funds, what you should be doing is buying more bonds.” I’m sitting there thinking, “The interest rate is 2.7% but inflation is going up by 8%. How does that work?”

That’s a guaranteed money-loser. Light a match.

If you buy real estate in a 4% or 5% cap or whatever it is, it’s going to continue to rise and it’s going to move with the market. It’s going to keep up with that inflationary pressure. You’re not losing ground as you do with the treasury or something like that.

What do you think the chances are? You don’t have a crystal ball and nobody does. Everyone is trying to figure it out. The Fed has shown to be pretty dovish up to this point and now they’re trying to channel their inner Volker. It seems like it’s more posturing than actual teeth. Do you think they’re going to pull a 180 and try to put a hard stop on this inflation? Do you think it’s going to be more incremental? Do you have a sense of what you’re looking for out there?

They revealed their playbook with the notes, as you’re pointing out, of half a point in each meeting.

They’re trying. What I try to do is I would try to put myself in Jay Powell’s shoes. Think about this. If you want to be Paul Volcker, he was not a well-liked guy. You put yourself in his shoes and say, “Am I ready to pull the trigger on aggressive rate increases and have everybody hate me?” First of all, if it works.

Also, have the politicians get thrown out of office. The politicians have been silent right now, which is interesting to me, talking about interest rates. I’m so curious. What are the behind-the-scenes conversations going on? I’m not privy to any of that.

It’s so hard. If you push rates like that and you fail, you go down in history as that guy. I have a little sympathy for Jay Powell here because it’s what he thinks he should be doing and what he thinks he can execute. How do you walk that balance? What we end up with is what may ultimately be a half-hearted attempt and crossing the fingers saying, “I hope this works.” It’s challenging. This is not an easy job. I certainly don’t want it.

Let’s say the Fed raises rates, real rates are still negative. One of the things that we’ve looked a lot at in the past is the nominal rates in the terms of the global money world. In Europe, you’re seeing negative nominal interest rates. Meaning if you put your money in a bank, you’re writing a check to the bank every month. Who’s going to do that? At that point, you’re driving cash into it to be active. It drives so much investment demand.

Inflation has such a negative impact on the psyche of people. Click To Tweet

We live in a global world and America is a fantastic destination. It is the world’s number one investment destination still if you look at real estate, corporate equities and other things. Negative rates are real in both nominal and real interest rates, yet we’ve seen cap rates compressed down to unheard-of lows with real estate.

What is the bottom line with our cap rates? Are they correlated to nominal rates? Are they correlated to real interest rates? With the battle of inflation, where do you see driving up real estate and demand for real estate? It’s the ultimate inflation investment. At the same time, interest rates are creating headwinds. How do you see cap rates playing out?

This is an open debate within the industry. I talked to so many investors who say, “When interest rates go up, cap rates will go up,” as if there is some sort of spread that’s going to be held no matter what. When I meet with the research analysts and the people who are digging into the numbers, you look at historical trends and the movement of the ten-year treasury relative to cap rates, you see there’s little correlation.

Over the long term, they’ve both been going down in general. When interest rates go up for short periods, by short I mean a year or two, you still see the cap rates still going down. An exception will be the global financial crisis in ‘08 and ‘09. That’s the exception. Cap rates did go u, but there was little liquidity in the marketplace. It’s not like you can map this out with a ruler and say, “Interest rates and cap rates are going to go up,” because of what you were talking about. There’s so much capital pursuing commercial real estate and all of that capital is competing with each other to place that into the property.

You also mentioned foreign are negative nominally. I was on the phone with some large investment groups with capital coming in from Europe. They said that it is coming in more aggressively than they’ve seen in years because the US real estate is considered to be a gold standard for an inflation cycle. It is stable, performing very well, and generating a positive yield. For somebody in Europe, if they’re looking at a ten-year bond that’s negative in Germany or Switzerland, that’s good.

When they compete with the US investor, the US investor says, “I need to hit 5% return,” or whatever going in. That money out of Europe is saying, “We don’t care. It’s a lot better than what we’re going to get over. We happened to put it somewhere safe that can ride out a recession if it comes. It can ride out the inflation and continue to grow. We’re going to be in a better place.” The US investor who’s saying, “Interest rates are going up. I’m going to wait for the cap rates to rise,” you might be waiting for a long time.

Global money flows are a big deal. Money is global. We’ll see how that plays out. I’m super curious if you have long data back in the ‘70s and ‘80s with high inflation eras. What were cap rates back then? I haven’t been able to find any data on historical cap rates.

It doesn’t go that far. We have good data back to 2000. That’s when CoStar or back then it was COMPS was founded and real capital Analytics was getting started. They started getting good quantified data. We have weaker data that’s going back to 1990 that we leveraged and modeled. Going back prior to that, it’s hard to get any real numbers. We haven’t been able to track anything down.

There are stock market data. In the stock market, you have the tale of two cities. You have companies that have pricing power with their products. In other words, Apple. Can they raise the rate of the price of their cell phone? Yup. They have pricing power. Amazon is the same thing. Those companies tend to do well in inflation because they’re inflation-protected. They will tend to track inflation and then companies that do not have pricing power. Those guys tend to not do well.

My estimate is that real estate is a superior inflation protection investment. It’s going to be priced more like a growth stock than it is a non-growth stock. There will be a growth premium added to the price that people are willing to pay. It’s a bad deal today but I know they have pricing power in five years and I’m getting all my money back, then you can afford to pay a higher price now. Any thoughts on that?

ILB 32 | Headed For Recession
Headed For Recession: From a commercial real estate perspective, inflation is not the enemy. It is helping to push up the rents and it helps to drive income growth.

Even within real estate, there are some property types that are going to be more inflation-resistant than others. If you have a hotel, you reset your rates every day. You have almost complete inflation resistance with a hotel. It’s a different thing to run and it takes a lot of skills and knowledge of that business. That’s one type of real estate. At the other end, you have some high credit, single-tenant net lease investments, which are on fifteen-year leases that have renewals at the discretion of the renter, and maybe no price bumps even built into that.

You’re looking at flat revenue over a long period of time. That has less inflation resistance except for a couple of things. One, it depends on the underlying real estate. That will keep value. Also, the structure itself and the replacement cost will keep value but it’s not getting that cashflow to change the way a hotel or apartment building is. They tend to be a little bit less inflation resistant. I want to point out one thing. For some investors, a single-tenant deal makes a lot of sense because it has safety. It has almost no recession risk depending on the tenant who’s in there, so it’s low risk with a fixed return. It has less inflation resistance but it could make sense for some investments.

Will there be a growth premium for some real estate assets because of their inflation characteristics?

In a way, it’s not truly a premium but you see the capital moving there. We’ve seen multifamily getting a lot of attention. It’s the same with self-storage. If you look at those, the cap rate compression in both of those property types is significant. In 2021, 100 basis points compression for both of those. It’s 100 basis point compression in 2021 for hotels. Those have started moving especially limited service.

On the other end of the spectrum, I haven’t seen much of longer-term real estate Investments. There’s the performance of the individual asset. There are a lot of questions about what’s going to happen with offices. You haven’t seen nearly as much interest in that property type but industrial is behaving like apartments. You’re seeing huge compression there and a lot of capital going after industrial. Those are the hottest products. There’s the real estate side of it. Industrial is going to do great. It doesn’t matter. You’re seeing 9% rent growth. If that beats inflation, you’re good but other property types are a little softer.

One of the surprising things or maybe not was at the BE Conference, you made a presentation and you talked about retail. You were bullish on retail, which I love. I love the contrarian play. When everyone hates something, it’s probably a good time to be taking a look at it. We’re seeing a nutty cap rate in retail. Is retail dead? Is there time for a contrarian play in retail? What is your view?

Retail has been getting beat up for years. It was the retail apocalypse. Amazon is going to stomp it into the dirt. It’s going away forever and then you have a pandemic. What happens is that the entire sector gets lumped together and thrown in the garbage bin. People think that the whole sector is dying. The thing is if you look at grocery-anchored retail centers in the growth part of the country like Atlanta, Florida, Texas or Arizona, it’s done well.

Cap rates are down compared to pre-pandemic when the cap rates are up. Now they’re down about 30 basis points. They’re down a little bit. That type of retail has a lot of staying power, especially with the migration of demographics and household formation. Suburban retail and grocery-anchored in the southern half of the United States are doing great. I read an article that Kmart is down by 2 or 3 stores. If you have that Kmart cadence store and that retail make up that problem. Sears was doing that to shopping malls. They were killing the shopping malls. They wouldn’t go away or die.

The pandemic helped clean out a lot of that stuff. It had shoved a lot of those businesses that have been dying for twenty years and pushed them off the cliff. That helped clean up the balance sheets on a lot of those properties and turn them into something viable and something usable. I do believe that retail is positioned to do well, in general.

The thing is you have to look at the local demographics, the foot traffic, what retailers are going in there, and who the customer is. There are a lot of retail properties that can do well that are being overlooked. You don’t have the bidding wars that you have in apartments and industrial properties. Retail is a little bit overlooked. There are some opportunities for investors to place capital into those properties.

We're in a transitionary period, but it’s not uniform. Click To Tweet

There’s always something dead. I remember being offered data centers at the end of 2001 when the market had been totally overbuilt. You could buy these data centers for 50% of the cost. Now you would be brilliant had you done that. At the time, I was like, “No one had any faith that the internet would ever be important again, that they would ever use the capacity to that degree again,” but here we are. Had I done that, I would be a genius. This retail apocalypse is going to make geniuses out of some investors but as you point out, it’s not all the same. Let’s be super careful about where we stick the fork in.

What is your prediction on cap rates? In general, I know it’s different for every asset class. You’ve mentioned that there’s a little bit of a disconnect in the market right now between buyers and sellers. We’re feeling that a little bit on some of the assets that we’re looking at and having to underwrite a little bit differently with a higher cost of capital. Do you think it slows down transaction volume? Do cap rates revert a little bit or do investors accept lower returns? Where do you see this playing out? We were right in the middle of it so it’s hard to know exactly.

We’re in a transitionary period but it’s not uniform. One of the things I do is travel around the country. I go and speak at a lot of conferences and events so I traveled to different cities all over the country. I would walk into a conference room and if I was in one state, nobody is wearing a mask. If I walk into a conference in another state, everybody is wearing a mask and they are all sitting 6 feet away from each other. There are completely different realities depending on which city you’re standing in at any given time. That’s true with cap rates.

If you’re looking at Florida, Texas, Arizona, and Las Vegas have entered the fray now, bidding on those assets is aggressive and it’s a knife fight when you walk in on those deals. There’s a lot of bidding activity. If you walk into a deal in San Francisco, New York, Seattle, Portland, and some of the markets that were more aggressive in their efforts to fight the pandemic, it’s not as strong. There’s not as much bidding activity there.

The cap rates are still coming down. You’re seeing more bidding activity than you were a few months ago. Whereas in Phoenix, you have seen the bidding activity start to level off and pull back a little bit as interest rates rise. Those cap rates are already compressed in those hot markets, but you still see a little bit of softness in some of those late recovery metros. It’s not uniform by product type or by metro. It’s different so it’s hard to speak of an overall trend because some markets are still strengthening and some are starting to soften up a little bit.

Another thing I would love to get your perspective on are development trends. At a macro level and in several asset classes, we see a big supply and demand imbalance, especially in residential housing, multifamily, storage and industrial. As investors, we’re seeing an opportunity on the development side. What are the bigger trends you’re seeing? Are the trends positive right there? Construction cost might create a little bit of a headwind, slowing down some of that but I would love to dive into the development side.

The margins we’re seeing are still good even with higher construction costs. The difference between your cost to build and the price that it’s valued at is significant. There’s a margin.

In terms of the outlook for both apartments and industrial, we expect record levels of construction completions in 2022. They’re both still on the upswing and they’re still falling short of demand. They’re not building fast enough.

Even post-completion is still falling short.

If you look at housing, it has a huge shortage. This is going to drag on for years. I keep reading articles about a housing bubble and how housing is going to fall off a cliff. I don’t see how that’s going to happen when the entire Millennial generation is out there trying to find a home. They postpone weddings and marriages. Now they’re starting to get married and moving out creating new households. They need a place to live.

ILB 32 | Headed For Recession
Headed For Recession: It’s hard to speak of an overall trend because some markets are still strengthening and some are starting to soften up a little bit.

There is a housing shortage in the country. Even though we’re going to put out 400,000 apartment units give or take in 2022, that’s still not going to keep up with demand. Our forecast for the vacancy rate in 2022 for multifamily has flat down a little bit, but it’s hard to do. Vacancy rates are already low with a 2.4% vacancy rate for apartments, which is unheard of and we’re still forecasting that they will go down a little bit more despite record completions.

The same is true with industrial. Record completions can’t keep up with demand but anything is marginal. That construction cost is a barrier. Even with multifamily, there are other problems like getting an appliance to put into the unit. I talked to builders who go into the Home Depot and buy all the appliances in order to get certificates of occupancy to get those units out on the market because their suppliers have run out. You get that shortage.

Self-storage is another one that I track a lot that’s running into challenges. There’s a lot of interest in developing new units but they can’t get self-storage doors. The self-storage doors are made out of steel, and the major self-storage door manufacturers can’t get steel to make the doors because they got bought by the appliance company that is next in line behind the auto companies. Nobody can get the steel down to that level at the self-storage door manufacturer, which is shortening up the new supply construction in self-storage. You have to look beyond the surface. There are a lot of nuances inside that impact whether or not a building is constructed and whether or not we have something there to meet demand, which is at a record high.

That goes back to the economic drivers of all these things going on. Do you see some of the supply chain challenges being solved anytime time in 2022? Is this something that continues because it’s been so dislodged?

The supply chain problems are not going away fast. This has been a problem all these years. We keep thinking we’re going to solve this. The city of Shanghai is on a lockdown. One of the highest population cities in the world is locked down because of a zero COVID tolerance policy in China. That can shut down an entire port overnight. That can shut down manufacturing facilities overnight. Your supply chains that reach into China have a real challenge because you don’t know. The whole thing could be flipped like a switch.

Meanwhile, down in Texas, you have issues with the new laws that were put in place there requiring trucks to be inspected as they come in from Mexico. The truckers don’t like that so they’re blockading the port of entry. I was reading an article about how that’s going to disrupt the supply chain for basic necessities. Food in Texas is going to run into shortages over the course of weeks because of this policy decision. There are a lot of decisions being made. Somebody says, “This is a good idea. Let’s do this,” and then they go, “We ran out of food. Now we’ve got another problem. We’ll have to go back and fix that.”

Whether it’s port, shipping containers, trucking or whatever it is, there’s something happening. The price of oil is up over $100 a barrel. That drives up the price of fuel. Everything moving around our country is on a truck. Those trucks need fuel and that’s driving up shipping costs. There are a lot of challenges that are still there but it’s getting better. The backlog of ships at the Port of LA is down from 120 down to 40 or 50. There’s still a backlog of 40 or 50 that we’re trying to sort through. That will take time. Hopefully, by the end of 2022, we get to a resolution. We can get through that supply chain problem but we’ve got to stop shooting ourselves in the foot.

This is the last question that I have for you. I’m going to make you make a call on recession. Is it yes or no? We’ve got the Fed raising rates trying to channel Volker. You’ve got these tailwinds as you point out. The yield curve has inverted, as well as us. Recession in the next 24 months, yes or no?

I want to point out real quick the yield curve. The two-year versus the ten-year is inverted, but the three-month versus the ten-year did not invert. It’s more predictive. Do I believe that there will be a recession within the next couple of years? I’ve been debating that with everybody in my department. There’s a real risk. It will depend on the Fed how aggressive they become.

One other thing is small business sentiment is falling and that’s a big problem. If that falls low enough, that creates a recession. Consumer confidence is starting to fall. If that falls enough, that pulls back on consumption. 70% of our economy is driven by consumption. If the consumer loses confidence, that means consumption starts to pull back and that can drive a recession.

Prepare for recession. Be ready. Click To Tweet

The key thing is what’s going on between people’s ears. The flood of negative news whether it’s founded whether it’s real or not can create a self-fulfilling prophecy. The risk of a recession within the next 24 months is high. It’s elevated. I’m not going to say, “Definitely, yes,” but I had prepared for it. Be ready.

From an investor standpoint, where are you seeing the most opportunities? You mentioned that retail has the potential of being overlooked if it hits other asset classes. As investors, where should we be looking?

Here are the property types that people aren’t looking at that have good potential. Retail, especially suburban retail across the southern half of the country. Suburban office in the southern half of the US. If you look at markets like the West Palm Beach suburban office, it’s crushing it. There are some markets that are looking good. People don’t want to buy off the office here and go, “No way. I’m not touching it,” there are opportunities there. When you look at housing, housing still has a great runway. There’s a good five years of runway for housing demand that is going to outstrip supply and keep performance metrics good.

Multifamily and single-family or one of the other?

Both. For industrial, we can’t get enough of it. There’s a reshoring that’s happening because of those supply chains we were talking about. I was talking to the head of research for one of the major retailers in the US. They said look, “I have a ton of this product and I have zero of that product. In order to iron out our supply chains, we’re having to store more inventory here in the US. We need more industrial spaces.” The industrial is looking good.

Hotels, for those who know how to operate them, are great. Self-storage still has a runway and a higher risk. I keep listing off all these properties that are good. What has caution flags? The urban office still has yellow flags around it, maybe red flags. Urban hotels, especially the ones that cater to conferences are still yellow and red flags. That could change soon if we get a full return to the office and companies would start doing more business travel. Those types of hotels start to pick up.

Urban retail still has challenges. Northern US cities like New York, Chicago, Detroit, Seattle, Portland, and those types of markets tend not to have as much strength right now as the ones in the south. Probably the toughest deal is an apartment building in St. Paul, Minnesota, where they put in stringent rent control.

John, this was so insightful. Thank you so much for taking the time to share with us. I’m sure you guys have free reports put out in different asset classes. What’s the best way for our readers to access some of Marcus & Millichap’s research? This is insightful information.

Visit our website, Our research is all posted there. I record weekly videos that are posted up there. People have to register their email addresses and log in. They can access all of our research. Also, for those who follow me on LinkedIn, I post most of our research up there as well. There are a lot of ways to access all of that information. We’re here to help.

Thanks so much for coming on, John.

It was good. Thank you for being here.

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About John Chang

ILB 32 | Headed For Recession

John Chang is the Senior Vice President, National Director Research Services at Marcus & Millichap Real Estate Investment Services

John Chang serves as the National Director of Research Services for Marcus & Millichap. He is responsible for the production of the firm’s vast array of commercial real estate research publications, tools and services. Under his leadership, Marcus & Millichap has become a leading source of market analysis, insight and forecasting, and the firm’s research is regularly quoted throughout the industry and in mainstream business media.

John oversees a team of dedicated real estate research professionals who produce the firm’s more than 1,000 annual market research publications and conference presentations. These detailed reports, analyses and presentations integrate economic and financial market trends with insights on all major commercial property types including: Hotels, Industrial, Manufactured Housing, Multifamily, Office, Medical Office, Retail Multi-Tenant, Retail Single-Tenant, Self-Storage and Seniors Housing.

John is a seasoned industry analyst who has been quoted in numerous publications and is an active member of the NMHC Research Foundation Advisory Committee, the ICSC North American Research Task Force and the NAIOP Research Foundation. He regularly presents at a wide range of conferences and events hosted by industry-leading organizations such as the NMHC, NAIOP, ULI, CCIM, ICSC, SSA and numerous others.

John joined Marcus & Millichap in April 1997 as a Research Manager in the Seattle office. After holding executive marketing and e-business positions with premier residential real estate firms in the Pacific Northwest, he rejoined Marcus & Millichap in November 2007 as the head of its Research Services division. John was elected as Vice President in 2010, advanced to First Vice President in 2013 and promoted to Senior Vice President in 2018.


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