More Economic Difficulties to Come, Warn Economists

Lock up all your financing needs now, advised Ken Rosen during NAREIT’s REIT Week, because the U.S. economy’s performance is likely to grow worse before it grows better. Rosen, chairman of Rosen Real Estate Securities L.L.C., offered a somewhat negative view on the nation’s economy during a spotlight on the State of the Economy that also featured Richard Berner, chief U.S. economist & co-head of global economics for Morgan Stanley & Co., and was moderated by AvalonBay Communities Inc. chairman & CEO Bryce Blair. Berner offered a somewhat more positive outlook, with an outlook for a slightly stronger 2009, although he warned of higher volatility, higher inflation and a further tightening of monetary policy leading to higher borrowing costs. Rosen warned of “significant risk” that 2009 may be worse than 2008. “We really haven’t had the down (in the market) yet.” All that said, Rosen predicted a moderate recession as a more likely scenario than a deep one, with a 50 percent chance of the more moderate variety versus 45 percent chance it will be much worse. In the former case, he expects the unemployment rate to rise to 5.8 percent, with T-bills at 2.25 percent and T-bonds at 4.5 percent, the stock market reaching 1400 and the Nasdaq 2300. The worse scenario would come about if the down market spreads further globally and if “one more bad thing” occurs to influence the markets. He pointed to the consumer as well as global events as the key to what happens. The core property types of apartments, office, industrial and good-quality retail continue to portray a solid supply-demand balance, he said, with the commercial real estate sector generally in “very good shape” although there might be a little more of a correction to come. Still, “real estate cities” are prevalent among those with negative employment projections, including Miami, Riverside, Las Vegas and Phoenix (along with Detroit). On the other hand, Houston and Dallas remain strong, along with the technology cities like Seattle and San Francisco. New York City has also managed to persevere despite significant financial sector layoffs, but Rosen predicted it will lose 60,000 jobs during the next year and a half. Berner termed this year “the year of recoupling.” While he expects the U.S. economic downturn to be mild, he also expects parallel performance in Europe, Japan and to some extent emerging markets in Latin America and Asia. Energy costs are a big contributor, he noted, and he does not expect prices to drop again below $100 a barrel—in fact, they are more likely to reach $150 than drop below $100, he said. Food availability is another concern globally. Which countries will be the winners and losers will depend on how they deal with inflation, he added, warning of problems in Russia, China, India and Brazil—the so-called “BRIC” countries. In the United States, Berner sees a bigger supply-demand imbalance than Rosen predicted, with vacancy rates starting to rise, rents starting to drop and movement from Class A to Class B properties already occurring as a result. A slowdown in construction after last year’s rise will help the sector toward a rebound, though, he said.