- Jan 08, 2014
By Robert Bach, National Director of Market Analytics, Newmark Grubb Knight Frank
The period around New Year’s, before the world returns to work in earnest, lends itself to reflection, and that holds true for those of us examining real estate trends. Here is what I wrote in my pre-new year dispatch five years ago:
With the recession about to enter its 13th month, commercial real estate looks set to suffer through a cycle of rising vacancy rates, softening rental rates and increasing loan defaults. The news is not all bad, however; an economic turnaround could begin by the end of 2009. Barely detectable interest rates, low energy prices and various rescue packages that have already exceeded $1 trillion will help to re-liquify the credit markets and jump-start the economy. Capital temporarily parked in U.S. Treasuries and other short-term investments will be redeployed into stocks, bonds and real estate when confidence returns. Despite the pain that is yet to come, the seeds of a recovery are being planted.
Re-reading this after five years, my thoughts are:
(1) Wow, conditions really were bleak back then. It was three months after Lehman Brothers collapsed, the global financial crisis was in full bloom, and the global economy was on the verge of a meltdown.
(2) The U.S. did an amazing job of negotiating the disaster. We were already two-thirds of the way through the recession when I wrote that paragraph. The recovery began even sooner than I expected, in July 2009. As bad as the Great Recession was, it could have been much worse.
(3) There is still a long way to go despite five years of recovery. The two areas that stand out in this regard are unemployment, which remains distressingly high, and monetary policy, the laxness of which is a sign of how fragile the recovery remains.
(4) Commercial real estate came through this with flying colors.
Regarding No. 4, five years ago, industry trade groups were asking the government for help in refinancing debt. What the government did instead, via the Federal Reserve, was to engineer the loosest monetary policy on record, which had the effect of bailing out troubled banks, real estate, stocks and other interest-sensitive assets. There was no equivalent to the Resolution Trust Corp. that acquired failed savings and loans in the early 1990s and then conducted the biggest fire sale of troubled real estate in history. Instead, a tsunami of easy credit, which has yet to recede, worked its way into all corners of the economy and financial markets, lifting real estate in the process.
We’re not out of the woods. The Fed has barely embarked on a multi-year journey of returning monetary policy to a more neutral level, while the government needs to address long-term deficits and debt. Rising interest rates, the byproduct of a stronger economy, will have an impact on commercial real estate investors. But the outlook is more hopeful than any time in the past five years.
Happy New Year!