Whither the Economy?

With the economic outlook remaining a top concern, economists, researchers and investors in U.S. commercial real estate offered their predictions for its performance yesterday at the Urban Land Institute’s Spring Council Meeting in Dallas. Speaking during the luncheon plenary session, “Capital Markets and Investment Trends,” and the opening general session, “Economic Outlook: Where Are We Now and Where Are We Going,” the speakers generally agreed that a recession is already underway and predicted a ways to go before recovery comes. Among their key observations: Hessam Nadji (pictured), managing director of research services, Marcus & Millichap Real Estate Investment Services Inc.: The for-sale housing market has probably not reached the bottom yet, and the economy is likely to lag for at least two more quarters. However, exports are contributing dramatically to the economy, more than offsetting the drag from housing. In addition, slowing job growth has had more to do with corporate decisionmaking than economic fundamentals, as evidenced by a parallel between a drop in corporate investment in the first quarter of 2008 and a shift in the balance of jobs during the same quarter, with the second half of 2007 showing 740,000 jobs added in growth sectors versus 298,000 jobs lost in declining sectors while the first quarter of 2008 saw 253,000 more jobs in growth sectors versus 485,000 jobs lost in declining sectors. More positive was the slowing to 20,000 jobs lost in April. Kenneth Bernstein, president & CEO, Acadia Realty Trust: There is going to be a huge shift in how deals are capitalized, as well as a deleveraging and a spread between high-barrier-to-entry assets and more accessible ones. Volatility is likely to continue to plague the public REIT market, leading to more consideration for forming private REITs to take advantage of the investment benefits in a more stable atmosphere, while retailers are going to have to figure out how to pull back as needed but at the same time be prepared to expand again quickly when the time is right. Wade Lau, vice president of asset management, Opus Properties L.L.C.: The transaction market will remain slow in 2008 and 2009. The industrial sector has been impacted by a rate of growth for 20-foot-equivalent-units that is at its slowest level ever, despite the imports flooding U.S. ports, while location matters more than ever in the office market, which will be affected by job losses. Darrell Wheeler, CMBS strategy and analysis: Despite concern about the retail and hospitality sectors, there are markets that remain underbuilt, and positive rent growth is still likely in many cities. Equity investment activity is likely to remain minimal nonetheless, but there are debt opportunities, in some cases with yields “well into the teens.” Bernd Knobloch, CEO of the board of managing directors, Eurohypo AG:U.S. fundamentals remain strong, which made the current economic problems unexpected. However, foreign investors are concerned about playing in an unsecure economy—at least in business. They are more comfortable with personal investments—namely, condominiums. David Greenlaw, chief U.S. fixed income economist, Morgan Stanley: The United States is likely already in a recession, with the economy’s performance expected to follow the shape of a “W.” Significant falloff is likely in the gross domestic product during the second quarter, following about 2 percent in the first quarter. Tax rebate and stimulus checks will likely cause a growth spurt in the third quarter, followed by a pullback in the fourth quarter, setting the stage for more sustainable growth next year. Questions remain regarding who will bail out homeowners. But a bright spot in the employment picture is the number of temporary workers on payrolls, which are allowing for less of a reduction in employment numbers than might otherwise have been the case. With just 1 percent growth in jobs during the last expansion, there is only likely to be a 1 percent decline, pushing unemployment up only slightly, to 5.7 percent. And when the financing market returns, expect to see some forms of securitization, including a return of the jumbo mortgage; in addition, banks will play a more important role in the future, but the subprime market may never really return. Gadi Kaufman, managing director & CEO, Robert Charles Lesser & Co.: There is not likely to be a pickup in demand until consumer confidence and stability return to the market. And for those to return, 1.5 million jobs a year will be needed—something that is not likely for about 18 months.