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CRE is Not Immune to the K-Shaped Economy
Experts quoted in an Urban Land article discuss the risks and challenges of uneven economic growth
A recent CNN article explained that a good way to understand the current K-shaped economy is to “fly on an airplane.” According to Delta Airlines’ quarterly earnings, main cabin ticket sales were down 7% year over year, while premium cabin ticket sales had increased by 9% from the year before.
“Put another way: Rich people and the companies they work for and ownare doing great, while the masses are tightening their belts,” CNN journalist Allison Morrow wrote.
The current situation not only impacts airline economics. It also affects commercial real estate, as discussed in an Urban Land article. Much of the article focused on the impact on retail (i.e., luxury retail = good, mass retail = not-so-good).
However, “for developers, investors and lenders, the central risk is one of concentration,” explained Sam Chandan, head of Chandan Economics and the founding director, Chen Institute for Global Real Estate Finance at the New York University Stern School of Business.
He told Urban Land that an economy that takes its cue from equities and real estate wealth effects to support consumption “is inherently vulnerable to asset price corrections.” Furthermore, if markets pull back, this could erode the spending on the K’s upper arm, impacting property cash flows and credit performance.
Meanwhile, Andersen’s Managing Director Randall Sakamoto explained that uneven economic performance is adding fuel to the current volatile economic risks. In such a scenario, “it does not take much for asset and corporate values to fall precipitously when much of the investment capital is focused on a limited number of sectors.”
At the same time, there has been an improvement in sectors such as experiential retail, resort hotels, and self-storage, with the residential sector doing well. However, high-end housing needs to be watched. “Housing may be the canary in the coal mine, with pricing trends of different segments of apartments and single-family homes raising flags before economic trends impact commercial real estate sectors,” Randall noted.
- ◦Economy
- ◦Policy/Gov't
