Why this downturn will be different.

Lessons from the 1990 and 2009 recessions.

For those of us who have been in business for more than ten years can attest, cycles are an ever-present part of our economic structure. Recessions can be long or short, but they are inevitable. However, they are hard to predict. In hindsight, they may have been obvious; but they seem to surprise most of us.

Therefore, I am not going to predict when the next downturn will occur (although, there are not many indicators that make us believe it is imminent). I do believe that it is more likely to be able to make a reasonable forecast about how it might look, based on our experiences with the two great recessions that began in 1990 and 2009.

I do believe that this region will experience a slowdown before we actually enter into a recession. The problems that we are already experiencing, foretell the more severe impacts they will soon have on our local economy. First, construction costs are escalating, leading to much higher apartment rentals and office & lab rental rates. With some projects no longer economically feasible, the supply of space will get even tighter. This will make it much more difficult for businesses to expand where they prefer to locate, due to the lack of space and/or its cost. Second, our labor force is at its lowest unemployment rate in decades. With a constrained workforce, our local businesses will find it difficult to expand and might need to consider leaving the area.

As to the next recession, the primary factors that are believed to have led to the 1990 recession include inflation concerns and the resulting Fed’s restrictive monetary policy, an oil price shock, and a major decrease in defense spending. However, for our region, it was primarily the backlash from the Savings and Loan debacle. The epicenter for the S&L bank problem was the Southwest. Unfortunately, as the downturn worsened and the bank regulators wrapped up their efforts, they left Texas and were sent to New England. The next years led to bankruptcies, foreclosures and bank’ closing their doors (ever hear of the Bank of New England?) Performing loans were being “marked to market”, resulting in those loans being called in. Billions of dollars of real estate value evaporated virtually overnight.

In 2009, the Great Recession stemmed, first, from the collapse of the sub-prime home loan market, leading to the global financial crisis of 2007 to 2008. This recession was relatively short (December 2007 to June 2009), but with bank liabilities soring and assets diminishing, the collapse of the financial sector required a substantial bail out by the U.S. federal government.

What’s going to be different this time? Although there is more debt now than in those two past recessions, the leverage of debt to value is substantially different. Looking at our own commercial real estate market, the majority of “trophy” office properties purchased over the last 5 years have been with either all cash or low debt leverage (foreign buyers and pension fund investors dominating the investors).

There are low vacancies and there is relatively no “shadow” space (tenants leasing more space than needed to ensure their future growth potential). There is generally more demand than supply for the housing in this region (part of the reason for escalating values).  The banking industry is as healthy as we have ever seen it, with much consolidation occurring. Capital is plentiful, whether for the VC investors or for business lending.

Finally, we have a vibrant and diverse economy playing off our strength as one of the greatest centers for skilled talent, fueled by one of the largest concentrations of higher learning.

When will the recession come? I don’t know. But I do believe that it will be short and mild by historic standards, and we will look back on it as one resulting in a “soft landing” for our region.

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