Expect a Slow-Cession This Year, Moody’s Tells GlobeSt.com Event

Article originally posted on Globe St. on April 5, 2023

Also, CRE Prices are “Facing Some Pain.”

The Fed will not stop hiking rates until it sees the unemployment rate spike, the banking system won’t collapse and there won’t be a recession in 2023—but whatever you want to call it will walk like a recession, talk like a recession and even sound like a recession.

“Our baseline is there will be no recession in 2023. It’s not a recession, it’s a slow-cession, growth will be very slow,” said Kevin Fagan, Moody’s top CRE analyst, in a keynote presentation entitled Insights into a Disruptive Marketplace at the GlobeSt. Net Lease Spring 2023 conference, held at the Marriott Marquis in Times Square on Tuesday.

Transactions are waning but, judging from the crowd at our annual event—the largest turnout in the 20 years GlobeSt. has been hosting these confabs in NYC—the appetite for insight in uncertain times keeps growing as the Fed mulls its next move.

As was the case at last year’s Net Lease event, contagion was front of mind on Tuesday: the banking system has replaced the coronavirus as the source of sleepless nights.

Rest easy, Fagan assured the capacity crowd.

“Our position is that this is a manageable position for the banks because the banks are much more capitalized than they were during the GFC,” Moody’s Head of CRE Economic Analysis told us, referencing the global financial crisis of 2008.

“When you look at what the banks are borrowing from all the Fed programs, it does sound like a real echo of the GFC,” he added. “But there are a lot of new programs. The new one-year term lending program is much better than the 90-day discount window. Capital positions are much better than they were during the GFC.”

So, you won’t need to count trillion-dollar bales of freshly pressed greenbacks bouncing out of the US Mint to fall asleep tonight. But what Fagan told us about the Fed may have you tossing and turning a bit.

“The Fed has to keep showing they’re going after inflation, they still want [to bring it down to] 2%. But the last part is always the hardest part,” he said.

The keynote speaker said the Fed will be looking closely at Monday’s JOLT report, referring to a job openings report that may prove to be the jolt that keeps the quantitative tightening monster Powell’s team set loose a year ago alive and roaming the landscape for another few months. Based on the last report, there are still an estimated 11M job openings in the US.

“We have sales coming down dramatically, but the Fed is focused on service-sector wages, which is the toughest nut to crack,” Fagan said. “It’s really hard to have a recession when you have that kind of employment, so they’ll keep their foot on the pedal.”

“CRE prices are facing some pain,” he said. “With maturities coming due, they’ll face more pressure.”

Fagan estimated that 40% of outstanding CMBS loans are coming due this year. “The banks don’t see these loans paying off and they don’t have the capacity to make new loans. There are some capacity issues that don’t bode well for rusty assets,” he said.

GlobeSt. reported this week that analysts believe the fires sales of assets from failed regional banks SVB and Signature will set off a plunge in CRE prices. Moody’s analyst indicated that the pricing reset could cut across all sectors.

“Industrial is approaching an inflection point in pricing,” Fagan said, adding that the spreads between interest rates and cap rates are getting so tight in the multifamily sector, multifamily owners are contemplating the specter of untenable negative leverage.

A pricing reset may take a while to play out, he added, because “we have a lot of fat in the pricing.”

Moody’s is projecting that when we emerge from the slow-cession, the Fed will quickly drop rates down to 2.5%.