Top economist isn't expecting a recession

But risks lurk, such as a squabble in D.C. over raising the debt ceiling

The U.S. economy is likely to avoid a recession, even with a downturn in housing and commercial real estate, economist Mark Zandi predicts.

Zandi, chief economist at Moody’s Analytics, gave his forecast last week at an economic and commercial real estate outlook session sponsored by property firm Marcus & Millichap.

He joined real estate execs who talked about where the economy and their industry is headed this year.

Zandi said he’s betting the country won’t see a recession — a view counter to many economists who think the U.S. is teetering on the edge of a downturn.

“It’s clear that the pessimism regarding the economy is running thick,” he said. “I’ve been a professional economist for more than 30 years. and I don’t think I’ve ever seen anything like it.

“The consensus view among economists is we will suffer an economic downturn of some form in 2023 or early 2024 — business people think so as well.”

But Zandi isn’t onboard the recession train.

“With a little bit of luck and some reasonably deft policymaking by the Federal Reserve, I think we will be able to make our way through without an outright economic downturn,” he said. “It will be a difficult year but it won’t be a year of recession.

“It will be tricky. There are a lot of risks out there.”

One of the risks he highlighted would be a refusal by Congress to lift the federal debt ceiling. “You can see the economic loss will be very significant” if that happens, Zandi said.

Real estate markets are resetting because of the higher interest rates the Federal Reserve has used to dial down overall inflation.

“I do expect housing prices to decline about 10%,” Zandi said.

The biggest price drops are predicted for hot markets in the Pacific Northwest, the desert Southwest, Colorado and parts of Florida, according to Moody’s.

“The risk here is once prices start to decline, things can take on a life of their own,” Zandi said. “People are pushed underwater — the value of their home is less than the mortgage debt they owe.

“You could see more distressed sales,” he said. “I don’t think that’s going to happen, but that clearly is a risk.”

Likewise Zandi said apartment rents are trending lower across the country after recent run-ups.

“You’ve seen less demand because of the high rents and unaffordability,” he said. “Vacancy rates are starting to turn up a little bit, taking the edge off rents.

“That should help to support lower inflation.”

Sharply higher borrowing costs have more severely impacted the commercial property market.

“We are all feeling the impact of the most aggressive financial tightening this county has experienced since 1980,” said Hessam Nadji, president and CEO of Marcus & Millichap. “There’s been a significant slowdown in transaction activity, which is understandable when you have debt increase so much, so fast.”

Nadji said nationwide commercial property trading volume was down about 60% in the fourth quarter.

“All of these interest rate increases have a six to nine month lag effect,” he said. “Not all the impact has been felt yet — we have more to come.

“It is putting a lot of pressure on prices — there is no question about,” he said. “The market is recalibrating.”

But he said properties still are trading if they are priced realistically.

Nadji doesn’t expect the kind of property shakeout he has seen in previous cycles.

“There is a wall of capital waiting to come into commercial real estate,” he said. “That’s why I don’t think there is going to be a bargain basement pricing or fire sale period coming up for the market.

“There is very little actual distressed sales or distressed loans.”

A surprise bright spot in the commercial property sector is the shopping center market, which suffered consumer migration from storefronts to the internet even before the pandemic torpedoed sales in 2020.

But retail centers have bounced back, said Tom McGee, president of the International Council of Shopping Centers.

“2022 in particular was a very strong year for retail,” McGee said. “Shoppers rediscovered the joy of physical shopping.

“The leasing activity in the industry is very strong right now,” he said. “There has not been a lot of new supply really since the financial crisis.”