CBRE’s Levy Doesn’t See Recession on Horizon

By Dennis Kaiser

CBRE’s Spencer Levy, Chairman of Americas Research & Senior Economic Advisor, kicked off Connect Westside Los Angeles last week noting how similar today’s CRE issues are to those faced over the past 50 years. He noted the worry over rising inflation remains a key economic factor that underpins today’s decisions, though it may be a misplaced fear. “Inflation isn’t just going to be lower for longer,” he predicts, “inflation is going to be lower forever.”

Levy framed the discussion noting that while we face similar issues, today’s CRE leaders must evolve from a “set it and forget it” CRE mentality. The disruption in the marketplace toward more flexibility may result in lower cap rates, shorter leases or even license agreements with space operators. That means capital markets must adjust to a new reality that carries more operational risk than before, which must be met with more “operational capabilities.”

Yet, he pointed out in his 2020 forecast that the future will be significantly shaped by Millennials, as they emerge as the No. 1 age cohort over the coming two-plus decades. He predicted that rising demand for more flexible environments — such as Airbnb or co-working spaces — will increase as a result of the Millennial cohort’s influence. Some believe these flexible spaces will negatively affect asset values, though Levy said he doesn’t see that likely happening as a result of the “gig thing,” even in a low inflation environment.

He said, “We are going to see not just the maintenance of value in 2020 and beyond, we’re going to see an increase in that value as commercial real estate benefits from a perpetual low interest rate, low inflation environment, and the alternatives, in particular bonds and stocks, aren’t that attractive.”

Levy believes no matter who may win the White House in the election season that is shaping up, CRE will remain on solid footing. He believes other factors matter more in shaping a market’s success. Levy highlighted five factors that he sees creating “awesome office cities.” Those include talent and specifically the access to it, infrastructure, foreign capital, ease of doing business, and live-work-play environments.

The most important factor in determining the markets that rise to the top, noted Levy, is having access to the talent needed to service the business a company wants to be in. As an example, Los Angeles’ historic base of top media talent has resulted in the emergence of Silicon Beach as an industry, which has served to diversify the economy and elevate the talent base even higher. That is expected to serve the region well should a downturn occur.

Foreign capital, though fickle, is important to transforming a city too, said Levy. Not only does it provide an immediate boost, foreign investors typically attract “friends,” as well as a host of other positive benefits such as jobs, diversity and construction.

The need for authentic areas in a city where people want to live, work and play is more important to driving a market’s success than a city’s business friendliness. Though Los Angeles is not among the best places to do business, it retains an authentic character and is seeing the creation of “new cities” within a market. He pointed out new districts are emerging everywhere in the U.S. He cited such places as the Arts District in Downtown Los Angeles, the Fulton Market District in Chicago and even in Charlotte, NC where high-rise tower work environments are giving way to smaller industrial buildings in far-flung sections of the city. It requires property owners to invest to “keep an asset relevant,” he said.

Levy closed the forecast touching on the economy. He said, “We have no recession in our forecast anymore.” He does see slower growth, low inflation and low interest rates ahead. Still, the U.S. and UK remain attractive for foreign capital. Major markets such as Los Angeles, San Francisco, New York and Washington, D.C. will continue to experience a “heavier concentration of talent and capital flows,” which make them attractive, he notes. Despite cap rate compression, it is a “great time to buy,” Levy concluded.

For comments, questions or concerns, please contact Dennis Kaiser