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A Warning Sign

Author: Aaron Jodka

By Aaron Jodka  | OCTOBER 2019

Headline after headline has sounded the alarm bell about a recession. Job growth has slowed, the Federal Reserve has cut interest rates twice and recently injected capital into the overnight lending market, the ISM manufacturing index is at its lowest level since 2009, the yield curve is inverted, and oil prices spiked after the recent attack on Saudi Arabia’s production facilities (and the last two events are historical leading indicators of a recession).

 Add in a trade war and a potential impeachment process, and American consumers, who drive so much of the economy, could be spooked enough to pull back and increase the stress. In fact, people are thinking more about recession, as shown by the chart below of Google search results for the word “recession,” dating back to 2004. The month with the most searches was January 2008 (100 on the axis). This August, the popularity reading was at 81, the highest since February 2009, in the midst of the worst U.S. downturn in generations.

Google Search Result Popularity_Recession

Here in Boston, conditions feel a lot different, don’t they? The market remains robust. Tourism is strong, hotel developments have sprung up to meet demand, and Logan has more travelers than ever. The state’s unemployment rate is sub-3%, the roads have never been more crowded, and finding qualified employees is hard. Could we completely buck a national recession? Yes. Is it likely? No. In past downturns, Boston and the broader Massachusetts economy faced outsized declines in the S&L crisis and tech bust, while the Great Recession’s effects were less severe. Time will tell how we fare in the next recession, but for now, the appearance of warning signs and indicators should alert both real estate investors and tenants.

While correlation and causation are not the same thing, in the past, $100/SF gross asking (and achieved) rents have marked the top of the cycle. We have seen $100 achieved rents in this cycle; at the same time, developers are underway on numerous projects downtown, with a pipeline nearly overflowing in 2021–2023. Many of these developments have broken ground. During that time, seven million SF of new product could come on line, the highest amount in Boston in a three-year period since the late 1980s.Forecast_Vacancy-Supply-Absorption

Finally, the numbers in the third quarter sent up a red flag locally. From the late 1990s through 2009, there were seven instances when all three of Boston’s office markets (Boston, Cambridge, and Suburban) posted negative net absorption at the same time. That happened again this past quarter. In the past, these events have coincided with a recession or happened in the early stages of the following recovery. One quarter does not make a trend, and the Atlanta Fed’s GDPNow model predicts growth in the third quarter, suggesting that this could simply be a blip. Absorption, while negative, was only modestly so (about 150,000 SF for each market), and despite an increase in vacancy, East Cambridge still boasts a sub-3% rate.

Recessions have a tendency to be identified after the fact. Will we look back on this quarter as the start of a larger slowdown or recession, or will this simply be an anomaly?

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