October 10, 2022

JF2958: How a Recession & Inflation Could Impact CRE | Round Table

Each week for the Best Ever Round Table, the three Best Ever Show hosts — Ash Patel, Slocomb Reed, and Travis Watts — come together for a deep dive into a commercial real estate investing topic.


In this episode, Ash, Slocomb, and Travis discuss what a hard landing for the economy or out-of-control inflation might look like. They share their thoughts on what a recession would look like for the overall economy, how it would affect real estate in particular, and how inflation impacts real estate specifically.


New call-to-action





Click here to know more about our sponsors:


DLP Capital



Cornell Capital Holdings






Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel, and I'm joined today by Travis Watts and Slocomb Reed. Travis and Slocomb, our fellow co-hosts for the Best Ever podcast. This is our weekly roundtable, where we pick a topic and share our discussions with all of you. On today's episode, we're going to have a discussion on what a hard landing for the economy, or out of control inflation would look like. Every recession has been preceded by a rising rate environment, which we're currently in. So let's assume rates keep rising, and that ends up leading us to a recession. Travis, I'm going to start with you... What does that look like for the overall economy?

Travis Watts: Great topic. Great stuff. We were chatting here just before the show on a couple different ideas here... So first of all, Travis Watts, full-time passive investor and director of investor education with Joe Fairless over at Ashcroft Capital. It's really interesting, this go-around; you were sharing, Ash, that someone told you they went to a real estate conference, and no one likes to talk about the elephant in the room, right? We don't like to talk about recessions, or rising rates, or what that could mean. Everyone likes to remain bullish all the time on whatever it is they do. So that's why I'm happy to talk about it.

So for a little bit of context, we're talking about really the Fed funds rate when we talk about rates rising. So this is the committee, this is Jay Powell getting up there and setting a target, which is like an overnight borrowing rate for banks and lenders and stuff like that. So when they say 75 basis point hike, something like that, they're talking about raising that overnight borrowing rate. So when that happens, you see other types of rates rise as well, like a mortgage rate. So a) that makes it really difficult for businesses, companies to grow and to expand, and stuff like that. It also makes it hard for personal loans, or adjustable loans, or new mortgages that individual homebuyers are getting. So it all comes down to affordability, and where is everybody's threshold.

So with that in mind, a lot of economists have been thinking or predicting that the Fed is going to go too hard and too fast, because the inflation that we're seeing right now - we're going to have to jack rates way up. And if we do that, it's going to crush the public equities, the stocks, the real estate market, all those kinds of things, which will lead the United States into a recession, even though everyone knows we're in a technical recession right now, which means two consecutive negative quarters of GDP.

So let's say 2023 the US now is in a nasty recession. So the thought there is one of the only tools that the Fed can do to help out then is to lower rates again, and to try to stimulate, like they've done time and time again, to help people out. So we just don't know, and I don't have the crystal ball, but that's what we're talking about. But to answer your question, Ash, a couple of thoughts come to mind number one - and this is kind of my prediction, with the big disclaimer that I just quite frankly don't know what's going to happen... But I do think we are in recession, I do think it will continue in the short-term to look a little bit uglier, I do think the stock market's going to come down and retest the June lows, at least, at a bare minimum. We're almost there now. It's only like 5%, 10% away. And I do you think rates are going to keep rising.

So what we're seeing already is especially single-family homes taking a bit of a haircut because of individual affordability. In the multifamily space, we're starting to see cap rates reverse and go back up, which to me is a buying opportunity, because I'm a dollar-cost average kind of investor; so if you're gonna give me a 10% discount, I'm in. I'm doing two deals here recently, I continue to do deals, I did a lot of deals last year, I did a lot of deals during the pandemic of 2020... So I'm opportunistic in that way, for right or wrong. I could be dead wrong on all this, but I try not to time markets and to say "Yeah, it's going to be so nasty next year that I'm just going to sit on the sidelines and wait", because it may all just reverse, go back in a bull trend, stimulus comes back out, rates come down... We Just don't know what the future looks like. But a couple of things I will say... I don't think it's going to look like 2008-2009. We don't have bad lending practices like we had in '06, '07, '08, these NINJA loans, which is no job and no income kind of mortgages... We have a very qualified market. We're not really feeling the recession right now, because unemployment is very low, salaries are still growing and expanding... And the economy at large is still pretty healthy and doing good. So I don't think we're in for this new great depression, or some of these scary headlines that you're going to see.

That's just kind of my take on it - yes, everyone's going to be affected, yes, prices are going to readjust, but if you're opportunistic, and you've got some capital waiting to deploy, these could be opportunities, or you could choose to sit and wait and see how that goes. But every time I've tried to do that, like when the markets came down in March of 2020, I was thinking, "Oh man, these are 30% down, and I bet they go 60% down", and then all of a sudden, it's this V trend straight back up to the top and I missed out. So that's kind of where that comes from.

Ash Patel: Yeah, Travis. Thank you for your insight. I knew this topic would be right in your wheelhouse, and a wealth of information right there. Slocomb, your thoughts on what a recession would look like for the overall economy.

Slocomb Reed: Thank you, Ash. Slocomb Reed, apartment owner-operator in Cincinnati, Ohio. As a real estate investor, this next recession will be my first. I am not as credentialed to speak on what will happen in the general economy as Travis is, our you either, Ash. I will say, specific to apartment investing - a couple of caveats here; take what I say with a grain of salt - I have decided to be the episode optimist. Whether or not I 100% believe everything I'm going to say, I'm going to be the one who paints the rosy picture in this conversation today.

I will say that the prospect of recession is the largest reason that I self-manage. I want to be the one in the trenches, making things work, and I now have that expertise. To a point Ash has made in a recent episode, hopefully if you are a limited or passive investor, you are invested with the experts who know how to handle this, or have done this before.

A couple of points, specific at least to apartment investing, that could come from an economic recession right now... The first thing to note is that this would be an inflation-driven recession, or a partially inflation-driven recession. Apartments have the ability to raise rents annually to cover that inflation, and if we're seeing inflation increase prices on everything, and possibly a wage price spiral like we last saw, I believe, in the 1970s, then apartment investors and apartment properties should be in a pretty good position to stay above the tide.

A couple other comments, to be the optimist... We are coming out of the best ever opportunity to lock in low interest rates for long-term fixed rate debt, or long-term debt in general... So listeners, I hope you did that. I'll leave it at that for now, Ash.

Ash Patel: Yeah, Slocomb, great perspective. And I'm gonna date myself here... I'm the oldest person here, I believe. I'm pretty sure, actually.

Travis Watts: Yeah, you definitely are.

Ash Patel: Yeah. Okay. So I'm 47 years old. I've lived through the dotcom bubble and the recession of 2008, and I'll tell you from my perspective... Slocomb, a lot of this is geared towards people that are under the age of 33, because they've only seen all the arrows go up into the right. So when a recession hits, I remember back in '99 a lot of my friends were kind of happy. And I'm like, explain to me why this is a good thing. And they said, "We have jobs, and prices will start coming down, so we can buy more. Our money goes further." And I didn't really put a lot of thought into that, but I'll tell you that when the economy is down and a recession hits, there's a lot of job losses. A lot of people take hits on their retirement savings, their portfolios, their stock markets.

I'll give you an example of the job losses. I was in the corporate world at the time, and we were hiring for one receptionist. We had former vice-presidents from other companies applying for probably a $12 an hour receptionist job. So I don't mean to sound overly pessimistic, but that should give people a sense of what really happens when a recession hits. A lot of people lose liquidity, their net worth goes down... Your parents, if they're older and anticipate retiring, their 401k is going to go down... It affects a lot of people negatively. And my next segue into a recession is how does that affect real estate? And Slocomb you already hit a lot of good points on locking in long-term debt at low interest rates. We may not see that again for a long time. Any other thoughts on the effects of a recession on real estate in particular?

Slocomb Reed: Ash, thank you. I am trying to stay within my zone of expertise here, which is why I didn't want to comment on the broader economy. I know some things... I haven't been punched in the mouth myself by a recession yet, although my operations are hunkered down for that. I have intentionally built my businesses to be able to handle major negative events.

One comment I'd like to add here - because I feel like Travis, and you as well, Ash, are going to be able to add some very good, broad perspective... One thing that I experienced very acutely going into the COVID lockdowns, and then dealing with the COVID pandemic, and a national political regime change in the midst of it, is that both the Republican and Democrat regimes in the national government gave assistance to my tenants to make sure they would be able to pay their rent. That wasn't necessarily the narrative at the time, but mailing out checks that were almost as much as the monthly rent to my tenants put them in a position to give them the financial stability they needed to be able to stay in my apartments, particularly my C-class workforce housing, the people who are intrigued when Amazon comes into town because they could get a $15 an hour job, and the people who were benefited by that event, because they saw wages rise all over the place, because now these other employers had to compete with Amazon. In those kinds of places, that tenant base was stimulated very acutely by both Republicans and Democrats in Washington.

Again, I'm being an unfettered optimist here. I believe we've moved into a time in our country when we call for short-term gratification much more than we ever have, and I am built as an operator to play good defense, especially when something like a recession comes. However, I can see where the federal government and other elected officials at more local or regional and state levels are going to feel pressure and succumb to pressure, and give stimulus where necessary to keep my tenants in their apartments.

Ash Patel: Yeah. Slocomb, such a great point. And my opinion is I think that the Fed although has a playbook, there's always new variables introduced; stimulus checks, the rent forgiveness, and all those government programs, those have not been done prior to 15 years ago, right? So there's always new variables being introduced. Great points, and unfortunately for me, commercial tenants often did not get a stimulus check. There's some PPP loans and other things for commercial tenants, but most of my tenants did not benefit from that.

Break: [00:13:16.06] to [00:15:11.09]

Ash Patel: Travis, your thoughts on how a recession affects real estate.

Travis Watts: Yeah, you both brought excellent points up. So Slocomb, I want to hit on something you said earlier about being able to rise the rents, and aside from stimulus, which I never think we can forecast or plan on in any sense - that's how I look at investing... When I personally project out for myself, I'm always saying every eight to ten years I'm gonna lose some money, and then hopefully the dust settles, and then we're back on the road again. So the variable, Ash, what you said, right now is obviously the inflation is different this time. This is inflation we weren't having through the great real estate crisis, and stuff like that.

So how it works, just to simplify this concept in an ideal world as an investor, let's say we buy a single family home, and we're renting it out for $1,000 per month. So what happens when your property tax goes up 10%, your insurance goes up 10%, the HOA if you have one goes up...? This is just general basic inflation - well, you have to raise the rents, because you don't want to take a 10% cash flow every year and say, "Sure, I'll just accept 8% now. That's good enough." No, you want to bump the rents so that you can cover those new expenses, and that's just how it works.

So what we're seeing right now is a weird dynamic with multifamily, because -- this is why I see it opportunistically. So the Feds raised some rates, that's decreased the purchase price on a lot of multifamily, and it's increased cap rates. So let's say we buy at a 10% discount. Well, a) that's nice to get a 10% discount, but b) we still have this terrible inflation, and we still have wage growth right now. I know out here in Florida they've already proposed $1 an hour more every single year till we get to $15, or something like that. So it's like $10 an hour last year, and then $11, and then $12, and $13, and $14. So we're still seeing that kind of thing nationwide. So hopefully, we can still justify for buying the right property that's conservatively underwritten, at below market rents already, that we can be able to lift those. a) getting a 10% discount; to your point, Slocomb, fixed-rate long-term debt on commercial, or commercial multifamily for that sake... That's like five, seven, maybe 10 years max when I say long-term... And buying interest rate caps to help protect the equity in the deal, maybe getting an assumable loan where the next buyer can take over your loan at a lower interest rate than what they are in the future... We just don't know what's going to happen.

So as we're locking in, back to the economists conversation I was having, if they're correct at large - I'm not naming any one particular economist, but if interest rates keep going up, we keep buying it discounts, and then they reverse rates back down, we're just going to refinance and have that much more equity in the deals.

So I'm what Charlie Munger refers to himself as "A hopeful pessimist." So I'm always looking at the downside and the risk, and not relying on the government and handouts and things like that, but I'm trying to be in that affordable sector, like Slocomb. He's more in the C class product type, I'm more in the B class product type...

And if you go back, another great quote from Warren Buffett is "We learn from mistakes, but those mistakes don't have to be your own." So I've read this Harvard study that got published about what happened to multifamily through 2008, 2009 and 2010. I've read that numerous times. But the point is - yeah, I wasn't there doing multifamily at that time myself, but I do see the outcome of it, and what happened on the macro level, and that gives me a little more certainty of what we're seeing today, at least.

Ash Patel: Yeah, great insight. I'll just add a few things. For real estate in a recession I think you have to plan on no more rent increases, increase delinquency, and lack of demand for maybe certain higher-end properties. All of these things need to be stress-test into your deals. And of course, cap rates rising because of the interest rates is going to make the value of properties decrease as well. So - awesome.

Last topic here, and this one I'm going to rely heavily on you, Travis... Inflation is typically caused by one of two things - lax Fed policy, printing money essentially, and supply shocks. Currently, we're experiencing both of them. We've been printing a lot of money, both through stimulus, and just government purchasing... And the supply shocks are twofold; one during COVID, and now during the Russian invasion of Ukraine, it's putting a lot of pressure on consumer staples, food, gas, energy... How does inflation affect real estate specifically? The real question is, how does carried away inflation affect real estate?

Travis Watts: Well, I think if you've tuned in, or at least watch some highlights from the Jackson Hole meeting that just happened with Jerome Powell, they're hyper-focused right now on getting this inflation down, at the risk, quite frankly, of being okay with really sending us into recession, because he sees that as their number one job; that's what they're hired to do, and they're going to do it. So that kind of hawkishness really scared the markets last week; I don't know when this episode is going to err, by the way, but we had a terrible Friday. Stock market indexes were down 4%, or something crazy, because everyone's trying to figure out what the next game plan is.

Here's some good supporting data. We don't have the data yet for August, but we spiked at 9.1% CPI reading, and then 8.5%, so we're temporarily at least seeing a decrease... And I hope that we continue seeing that. And what they're going to base their decisions off of are these types of readings. So if we see inflation go 9.1, 8.5, 7.5, 6.5, 5.5, there's going to be a time that they start tapering off and saying "We're good, let's sit and wait a little bit and let's see what happens." And I hope that that's the case; if we start seeing it come back up, 9.5, 10.5, they're gonna have to go so aggressive that what we're talking about right now could all be different. If we had to bring interest rates up to 12%, 13%, something like we saw back in the late '70s, early '80s, it would absolutely destroy the economy, and really the worldwide economy. So that's going to be a tough one to watch.

But I guess to answer your question, Ash, consumer savings have been decreasing. They increased temporarily through the stimulus era of the pandemic, and now we're kind of back to an all-time low savings rate, and people are really pinched. We've seen oil and gas taper off from $120 a barrel down to $90, or whatever it is today... So that's nice, because that's one of the leading indicators for inflation.

So to your point, Ash, I completely agree with you. If I'm doing a deal as an LP, the last thing I want to see is we're going to buy this property, we're going to jack rates $400 a month right out of the gate, and then we're going to have these five to 7% rent bumps every single year for the next five years. I think that's totally unrealistic, and we're putting people in a really tough spot.

But also to your point, Ash, when you're talking about the VPs applying for $12 an hour jobs back in the recession - this is why I tend not to do luxury, high-end, $5,000 per month new development in coastal cities and stuff like that, because a lot of renters are more of that kind of demographic. So if those high-paying jobs start getting cut, and we do start to see a reversal of the unemployment, and people getting laid off in mass numbers, they're going to be sliding down into that B and C-class product type, for the most part. Not everyone, of course, but statistically speaking, that is what happened during '08 and '09. So - a couple thoughts...

Ash Patel: Yeah, again, thank you, and I love your perspective. Best Ever listeners, some of the younger Best Ever listeners that may not be totally in tune to this... When the Fed makes a decision, it's kind of like a container ship with a small rudder. It takes a lot of time for that decision to take effect. But one of the weapons in the Fed's arsenal is anticipation. So when they make these comments - man, does that move markets.

So they can't just say "We're going to increase rates and see what happens." They came out swinging and said "We're going to attack inflation until it no longer exists." And part of that is getting consumers and getting investors in a different mindset, knowing what's coming.

The last topic that I have is are you making any different decisions knowing that there's some headwinds on the horizon? And Travis, I know you're very disciplined. Slocomb is an optimist... Anything different knowing that there could be some hard times coming?

Travis Watts: Yeah. Well, criteria-wise, as we just spoke about. Making sure that -- everyone likes to say they're conservative in their underwriting, but are they? You really have to look at exit cap rate projections, and cash on cash, and this kind of stuff... Or if they're saying "We're gonna refi and give you half your money back in three years" - this stuff may not come true. These are only projections. And I don't like to see that kind of stuff.
Look at the rent bumps, look at the business plan, look at realistically how low the market rents are compared to their competitors right now. You can do that on Apartments.com. So it's kind of that "Trust, but verify." But here's my perspective, Ash... If I can get into a conservative deal this year that I truly feel as conservative, at a 5%, 6%, maybe 7% cash flow, with limited downside and limited risk, that's just an adjustment mentally that I've had to make as an investor coming from deals I used to do that were 8%, 9%, 10%, 11% out of the gate, and double your money in three years. This is not the kind of environment that I think we're going to see those kinds of outcomes. So what's your alternative? Sure, I don't do a syndication, I go throw it in the public markets, and they go down 20%. I'd rather have a 5% gain than a 20% loss. So that's how I look at it.

Ash Patel: Slocomb, any decisions you're making differently knowing what could be on the horizon?

Slocomb Reed: There are a couple of things here, and I will say I am highly optimistic for the sake of good conversation in this episode. My own beliefs and opinions don't exactly line up with everything I'm saying, but it's a perspective I think ought to be shared in this conversation.

And a previous point on the question that you asked Travis, inflation being the result of supply and demand, the optimist would like to point out that we're still in a supply shortage of all forms of housing, especially apartments... And that that low supply that we have, especially in in-demand areas, is the key reason that rents keep going up. The demand is greater than the supply, and an economic recession outside of apartments isn't going to change that unless somehow miraculously a lot more apartments get built very quickly.

Specific to how I am shifting as an active owner-operator right now, looking at more turbulent waters in the future and not willing to predict exactly how they will pan out, I am seeing my LOIs getting beaten by greater margins more regularly now. And I think other investors offering on the same deals that I am are actually feeding on all of this optimism that I'm sharing right now, and particularly the supply and demand pressures on apartments that keep rents going up at the moment.

The question I'm asking myself is, "How can I skate to where the puck is going?" The goal long-term is, of course, to build a portfolio. I am more of a buy and hold guy than a value-add guy... And where I'm pivoting in the moment is, while the offers I'm willing to make are not all that competitive, the place where I can grow is in the services that I can provide to other investors. All these people buying these apartments for more money than I am willing to pay are going to need management, they're going to need renovation services, they're going to need things that are still desperately difficult to find in the labor shortage market that we're experiencing right now. And it gives me an opportunity to improve my game as an operator and build my companies.

So in an effort to skate where the puck is going, while my LOIs are not the ones getting accepted, I'm looking at scaling through providing services to these other investors who are willing to be more aggressive than I am at this moment in Q3 2022.

Ash Patel: Yeah, great perspective. Thank you for that, Slocomb. As far as me making different decisions, I've for the most part always tried to time the stock market. Sometimes it works, sometimes it doesn't. Opposite of Travis. Just in terms of real estate deals, we're just a lot more conservative. We're not banking on filling vacancies like we would have a few years ago. We are wanting longer-term leases from some anchor tenants, and we're just way more conservative. Exit caps, again, are going to be higher than our entry caps, and we're anticipating having to hold properties a lot longer than the two-three-year turnarounds.

So gentlemen, great conversation today. Thank you for all your perspective. Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five star review, share this episode with someone you think can benefit from it... Also follow, subscribe and have a Best Ever day!

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means. 

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

    Get More CRE Investing Tips Right to Your Inbox