'When will recession end?'

Real Estate Weekly, Dec 12, 2001 by Joel Herskowitz

These days, the question most asked is, "when will the market tam?" In other words, when will the recession end? Recently, I attended a conference of real estate professionals, where the question of when a "bottom would be hit," was put to the audience. There were approximately 200 people in the room and all but one person felt that we would not see the beginning of a recovery until some time in the first half of 2003. I admit that I was among the vocal majority. It was then, in preparation for this article, that I committed myself to exploring the possibility of an earlier recovery.

There are four phases in the real estate cycle: Expansion, oversupply, saturation and recovery. In phase one, expansion, rents and occupancy rise and new/spec construction begins. Of course, there is "increasing demand." Phase two brings with it, "decreasing demand," which results in oversupply and increasing vacancy. During this phase, new construction is still taking place -- a holdover from phase one. The hallmarks of phase three, where we are right now, are saturation, increasing vacancy, some construction completion and recession. The last of the four phases is recovery. Rents fall at a decreasing rate, vacancy declines and generally, no construction begins.

Although we were all aware of the fact, on Nov. 26 a panel of economists officially declared that the U.S. economy had entered its 10th postwar (WW II) recession in March. THANKS GUYS -- like we didn't know! Seriously, it was very good to know that the recession actually started over eight months ago. The average length of the nine previous postwar recessions was approximately 11 months. The shortest was January 1980 to July 1980--6 months -- during which the unemployment rate peaked at 7.8%. The lengthiest was July 1981 to November 1982 -- 16 months -- during which the unemployment rate peaked at 10.8%. Examining and using history as a guide, we are three months short of an average length recession (and only eight months away from the 16 month record). U.S. unemployment is still below 5%, which is, in comparison to other periods of recession, quite low. While unemployment is still likely to increase, it is a historically healthy number, coupled with the fact that the recession is already over eight months o ld and adding to the mix that new construction is at or near historic lows, seems to augur well for a "bottom" in the not too distant future.

What does this mean for the New York Real Estate market? Our near-term new construction pipeline is very low and not speculative, compared to previous cycles (2.5 million SF due to deliver in 2002, of which 93% is pre-leased). The only substantial new supply we are faced with is excess amounts of space for sublease, which will soften overall rents but not put landlords in dire financial circumstances. In summary, the New York City real estate market is in a better position to weather this downturn than it has been in previous cycles.

While we know that economic forecasting is not a science, we also know that when everyone believes that we are in for an extended "down" period, it can become a self-fulfilling prophecy. I am happy to report that in doing my research for this article, I found hoards of people that subscribed to recovery beginning before the end of second quarter 2002, as opposed to sometime in 2003. Stay tuned!