When the CEO of Boston Properties, the largest publicly traded owner of U.S. office buildings, said last week that “commercial real estate markets are currently in a recession” regardless of the resilience of the broader economy, it reinforced the tired cliché of the past three years: This is an unprecedented market cycle.

Regarding economic growth or deceleration, commercial real estate has historically been a lagging indicator, taking longer to slow than other parts of the economy, economists told Bisnow. But this time, CRE values are dropping before the job market has cooled and consumer spending has fallen.

Even in that context, whether there is a recession in commercial real estate — or whether one is coming for the U.S. economy — depends on where you’re standing.

We are in somewhat of a unique time, to the extent that there does seem to be a wedge in between a very, very healthy job market and how that translates into demand for specific types of commercial real estate,” said Victor Calanog, Moody’s Analytics head of CRE economics. “To say that it is a recession for a sector as a whole, I think, at this point, is a bit of a stretch.”

Recessions are deep, sustained,d and broad pullbacks from economic activity, marked by two consecutive quarters of falling gross domestic product, Calanog said. From that perspective, CRE is going through asset-specific, localized recessions, especially in the gateway cities where giants like Boston Properties have invested billions.

“I think we want to be careful and nuanced about the conversation,” Calanog said. “Is there a localized recession for office properties in dense urban areas in the Northeast? I’d say that perspective is probably valid.”

The four indicators that usually signal a recession — employment, spending, industrial production,n, and incomes — are holding steady in the U.S. Employers added half a million jobs in January, last week’s jobs report showed. Even amid the tens of thousands of layoffs announced recently, unemployment is at its lowest point since 1969. Consumer spending fell by just 0.2% in December, and U.S. GDP grew by 2.9% in the fourth quarter.

At the same time, commercial real estate has been stuck in the mud, at the mercy of the Federal Reserve’s aggressive interest rate hikes.

More than 65% of respondents to a Bisnow survey from the summer said they believed the U.S. economy was already in a recession as their deal flows stalled. By the end of the summer, Cushman & Wakefield was projecting a 20% decline in property values by the end of the year.

In the months since transaction volumes have come crashing down. Investment sales in the U.S. fell by 64% year-over-year in the fourth quarter of 2022, according to CBRE data. Bloomberg reported that approximately $175B of global real estate debt was already in distress last month.

Victor Calanog, head of commercial real estate economics at Moody’s Analytics.

Lawrence Yun, the chief economist at the National Association of Realtors, told Bisnow that commercial real estate recession talk is warranted by one measure. He said that the development of everything from office towers to retail stores and industrial spaces has slowed.

“[Commercial real estate has] been subtracting from GDP figures. So in that sense, it is a recession,” Yun said. “Commercial real estate is not contributing to GDP growth.”

Much of the sentiment around CRE’s downturn is a direct result of the rise in interest rates and the corresponding increase in capitalization rates, which drags down values. But prices hit all-time highs in 2021 when interest rates bottomed amid the pandemic, resulting in investors turning to assets like CRE that typically yield higher returns.

Commercial property sales hit a record $809B in 2021, per Real Capital Analytics data from The Wall Street Journal, beating the previous record by more than $200M.

The average price per unit on multifamily properties rose 21.6% in 2021, outpacing that year’s record rent growth of 14% — which was twice the previous record, according to Yardi Matrix data.

There were $125.7B of industrial sales in 2021 and $88B last year, driven by value appreciation previously unheard of — the average price per SF for industrial properties increased by 57% between 2019 and 2022, according to CommercialEdge.

With growth like that, a correction was inevitable, Yun said.

“There was an over-optimism in commercial real estate,” he said. “Now it’s just coming back down to earth.”

Property values peaked in March 2022, according to Green Street’s Commercial Property Price Index, and have dropped by 14% since.

That reset is due to investor reactions to last year’s interest rate hikes, which left developers and investors unsure how they would finance future projects and effectively ended the run of cheap money that has encouraged CRE investments over the last decade, S&P Senior Director Ana Lai told Bisnow.

“The tide has turned for the real estate sector,” she said. “I think the key difference here is the interest rate level is much more elevated than the past couple of recessions. The market is resetting expectations here. So what’s causing a slowdown in transaction activity.”

What is happening now across asset classes is a reset on fundamental values, Yun said. However, the mismatch between what sellers believe they can get for assets and what buyers are willing to pay will mean that prices will continue to lag.

He added that if commercial real estate were broken down into asset classes, multifamily would still be considered in growth mode because the overall supply-and-demand dynamics still favor landlords.

“Definitely in the office sector, it is clearly in a recession,” Yun said. “[There’s a] major contraction in building new office spaces. Who would want to build office space with rising vacancy rates  and  reduced rent?”

Owners unsure about the remaining value of their office assets — and unable to secure new loans without additional equity — have started handing the keys back to lenders or considering conversion. Some lenders are looking to sell the loan onward.

Office assets may have a further fall, Calanog said. Despite being the darlings of the office market before and during the pandemic, tech companies like Facebook, Microsoft,t, and Amazon are scaling back their real estate plans. Like real estate investors, tech companies have spent the last decade or so growing due tof to access to cheap debt.

“They are a little bit of a canary in the coal mine as to the future of commercial real estate demand,” Calanog said.

Outside the office market, there are indications that commercial real estate’s downward trajectory amid economic growth could be short-lived.

“While appraisals are likely headed lower, the real-time picture of property pricing shows a market where we’ve either reached the bottom or are very close to it,” Peter Rothemund, co-head of Green Street strategic research at Green Street, said in a statement.

The most recent jobs report and the Federal Reserve’s slowing of interest rate hikes have bred optimism that the economy might avoid the same contraction in CRE values. But if unemployment rises and energy prices spike again, Calanog said real estate performance could take another, more resounding hit.

“That’s when you kind of pull back on consumption; that’s how the dominoes are kind of connected,” he said. “And if one of [the economic indicators] falls — sentiment, jobs, consumption, so on and so forth — then we are in deeper trouble.”