PSYCHED
OUT
Statistically speaking, the experts
say the downturn is more a matter of
perception than reality...for now
Last year was an interesting one for
commercial real estate, to say the
least. The national economy entered
2007 on an upswing, but by summer, things
slowed dramatically. Much of that decline
can be attributed to the crash of the subprime mortgage market, which brought the
residential sector more or less to its knees by
year’s end. With weaker home-price appreciation, a tighter lending atmosphere and
less disposable income, households curtailed their spending. The uncertain economic outlook also caused businesses to
pull back on hiring and other capital expenditures. It wasn’t long before the “R” word
was being tossed around.
Yet while the prevailing sentiment is that
the US is heading into another major downturn, the actual data told an altogether different story. In fact, many experts believe
the perceived slowdown in growth—in both
the economy and the commercial real estate
markets—is psychological in nature.
That’s not to say the commercial side
hasn’t been impacted. Due to the fallout in
the residential mortgage sector, funds are
less available for acquisitions and development, and what is available is considerably
more expensive. In fact, the optimism
investors, lenders and developers had
going into 2007 dwindled as the year pro-
gressed. The same could be said of space
users. Those attitudes were little changed
as the New Year began.
Despite efforts by the Federal Reserve
and government to stabilize the economy
and mortgage markets, those segments continue to be areas of concern for many
observers. Consequently, businesses will
think twice before making any major space
decisions, and US households will continue
to tighten their purse strings. It’s only a matter of time before the data reflect these conditions, say experts. Regardless of when
they believe this will occur and to what
extent, the executives agree on one thing:
don’t expect 2008 to be a banner year for
most commercial real estate sectors.
ECONOMY
Is a recession ahead, and
what does it mean for
commercial real estate?
Are we headed for another downturn?
Not technically, say the experts. The textbook definition of a recession is two consecutive quarters of declining gross domestic
product, which the US economy has yet to
experience. GDP grew by 4.9% in the third
quarter of 2007 and by just 0.6% in the
fourth, reports the Bureau of Economic
Analysis. Yet while the rate of growth fell,
the figures still represent an expansion.
But in most other respects, the signs point
to a recessionary environment. When
assessing the current climate, Rocky
Tarantello, president of Newport Beach,
CA-based Tarantello & Associates, notes
the significant decline in consumer confidence, uptick in unemployment and deterioration in both household spending and
business investment. “Though we’re not
technically in a recession, it sure feels like
one,” he says.
Robert Bach, senior vice president and
chief economist at Grubb & Ellis in
Chicago, says the likelihood of a major
downturn is 49.9%. The main indicators, he
notes, are job growth and consumer spending figures. The unemployment rate rose to
5% in December, after hovering at about
4.7% during the second half, according to
the Bureau of Labor Statistics. Personal consumption, meanwhile, grew 2% in the
fourth quarter, compared to 2.8% in the
third, says the BEA. “Right now, it all falls to
consumers,” observes Bach. “Consumer
spending accounts for about 70% of economic growth.”
