Sequestration & CRE

By Matt DePinto, Senior Research Analyst, Lee & Associates Arizona: Many are speculating as to how sequestration could threaten the commercial real estate market. Though no one knows for sure, mandatory cuts across the board by governmental agencies will eventually have an effect on sectors such as office and industrial, which depend on federal and local government contracts and hiring.

Many are speculating as to how sequestration could threaten the commercial real estate market. Though no one knows for sure, mandatory cuts across the board by governmental agencies will eventually have an effect on sectors such as office and industrial, which depend on federal and local government contracts and hiring.

Sectors such as retail and multi-family could be affected indirectly due to overall economic conditions impacted by sequestration. Worse yet, according to Moody’s Investors Service, the U.S. could again face a credit downgrade if a plan to stabilize the national debt is not taken.

As expected, sequestration is the latest round in the government’s inability to compromise on spending. This constant barrage of governing by crisis is keeping companies all over the U.S. from investing and hiring, and is sabotaging momentum this economy is thirsting for.  By all accounts, it’s a matter of spending priorities vs. dollars that can’t be agreed on, but the result is that the citizens that elected them have been caught in the middle. There could be dire consequences coming over the next year that might not seem apparent today because it will take some time for these cuts to show up in the economy.

Commercial sectors such as retail could become affected as spending will become more cautious. The multi-family sector may slow down as well, as household formation could retract as it had in the past recession. Commercial real estate is particularly sensitive to overall economic conditions that affect hiring and spending.

Commercial real estate has emerged over the past year from the depths of the Great Recession and is trying to return to the market momentum that propelled it in the good years. However, the latest round of government brinksmanship could create an unnecessary crisis if they don’t heed the marketplace’s warning to get their house in order.