Yardi’s Paul Fiorilla: No Obvious Indicator for Major Recession…Yet

NEWARK, NJ – CapRE’s 2018 New Jersey Apartment Summit kicked off with a deep dive into the  investment sales arena, courtesy of Paul Fiorilla of Yardi Matrix. “10 Minutes with Yardi’s Paul Fiorilla: The Real Impact of Interest Rate Hikes on Investment Sales and Three Factors to Watch for in 2019” first included a look at interest rates before transitioning to his thoughts on the future, starting with next year.  According to Fiorilla, sales have shifted to secondary and tertiary markets since the beginning of the cycle, as interest rates have gone up. And that’s had the biggest effect on the poorer markets, where interest rates have been the lowest.

“We’ve had a shift, not a huge shift, but investors are looking for yield, and that has pushed them into secondary and tertiary markets,” he explained. “By and large the average price per unit has continued to go up. Here in New Jersey, rent growth has decelerated pretty much in line with the national average. In fact, Northern New Jersey has pretty much tracked the national average over the past few years.”

Furthermore, he shared, occupancy rates have come down a little bit as the supply has increased. “But when you look at a 96% occupancy rate, it’s still very good,” he conceded. “And this year we’re seeing the largest number of completions in New Jersey that we’ve seen since the beginning of the last cycle. And the new supply is mostly concentrated in places around transit, such as Jersey City, Harrison, Union County, etc.”

Next, Fiorilla provided his recommendations for three things to watch in 2019 – and the number one thing is the performance of the economy. “So we had a very long run, the economic growth this year is around 3% on the year, which is the best year in a long time,” he shared. “But again, after all of this time, a lot of people are trying to figure out what’s going to go wrong, when’s the next recession going to hit, and when will there be a down-turn?”

Paul Fiorilla, Research, Yardi Systems

Fiorilla then looked at some of the factors that historically cause downturns. Housing prices were starting to suffer a little bit before the 2008 recession, for example. “Oil prices were going up — but are now coming back down,” he continued, and he also mentioned the tariffs on GM as well as farmers in the Midwest.

“All of those things are potential trouble spots. But if you look at them mathematically, how much would any of those decrease GDP?” he asked the room of 300+ attendees. “In and of themselves, none of them come close. Maybe 225 or 250 basis point for any one of those things.”

In other words, there’s no obvious reason that the economy should soften too much. However, he cautioned, that may change as we go further into the future. “Once we get into 2020, the impact of the tax reform is going to be negative. In 2018 and 2019, tax reform is still injecting a stimulus into the economy, but by 2021 that will be a negative trend,” he predicted. “Again, we’re talking two years from now and it’s certainly a minor trend…”

Stay tuned for a future article covering the conclusion to Fiorilla’s remarks. For earlier coverage, check out an earlier CapRE Insider Report: Yardi’s Paul Fiorilla Gives the Low Down on Interest Rates at NJ Apartment Summit

Paul Fiorilla is Associate Director of Research at Yardi Systems, working on the company’s new Matrix data service, which collects property and loan data on multifamily properties in nearly 90 markets nationwide. Yardi has started publishing regular outlooks using the Matrix data. Fiorilla has worked in the industry as a writer and analyst for nearly 20 years. He spent six years as an investment vice president in the research group of Prudential Real Estate Investors, where he was responsible for publishing the firm’s well-regarded quarterly outlooks and white papers. Before joining PREI, Fiorilla wrote for the Commercial Mortgage Alert for 12 years, the last nine as managing editor. He also has worked as a consultant producing research white papers, outlooks and articles for clients that include Real Capital Analytics, Marcus & Millichap, Colliers International, Clarion Partners, Terra Capital and Institutional Investor. Since 2011, Fiorilla has served as volunteer co-managing editor of CRE Finance World magazine, which is published three times a year by Washington, DC, based trade group CRE Finance Council.