The message for commercial real estate: economy will pick up following another slow year
- October 12, 2010
Take the long view. It’s going to be another slow year for the economy. But in two to three years, economic trends emerging now will pull the economy out of the doldrums.
That was one of the key takeaways Tuesday at Virginia Commonwealth University’s 20th Real Estate Trends conference. The annual event drew about 800 real estate professionals to the Greater Richmond Convention Center.
“We are trending in the right direction,” said Raphael Bostic, a top housing official for the U.S Department of Housing and Urban Development. “We’re no longer on that steep negative decline we were on before.”
Unemployment has been leveling off, he added, and growth in the country’s gross national product (GNP) is positive. “We stepped away from the cliff in terms of what could happen.”
While market conditions for home sales remain soft, inventories of new and existing homes for sale are down from a year ago.
Another positive sign has been a major surge in profits this year for many businesses, said Ed Friedman, a director for Moody’s Analytics. Once profits start going up, employment usually follows. “You can only have so many productivity gains before you have to hire people,” Friedman said.
So far, hiring has been largely dormant. Private sector payrolls have been moving up on the order of 50,000 jobs a month. “You need more like 150,000 a month for sustained economic expansion, so we’re not going to see a quick decline in employment,” he said.
Another reason for long-range optimism is that consumers have reined in spending. According to Friedman, they have deleveraged $1 trillion worth of debt since 2008. Some of that has been in write offs. Yet, with household debt burdens improving, consumers are more likely to spend, giving the economy a lift.
On the credit/financing side, there is money in the system for deals, according to a panel of speakers who focused on debt and equity. During the discussion, titled “Finance Land or Fantasyland,” the panelists focused on projects ranging $2 million to $20 million, a typical size for commercial projects in Central Virginia.
John M. Maher, who runs the commercial mortgage group of Hartford Investment Management Co. in Hartford, Conn., said his firm has closed or committed $800 million to $900 million for various commercial real estate projects this year, including grocery store- anchored retail centers, industrial buildings and offices.
What financial markets need now to grow, said Maher, is certainty. “We’ve had such a turbulent market over the last two years. That uncertainty wreaks havoc on business. What I hope comes out in the November elections is a better direction on what the rules are going to be. How much is our health care going to cost? What about the tax situation? Business needs to know where we’re going.”
On the subject of the extending the Bush tax cuts, Freidman said Moody’s favors keeping the tax cuts for at least another year or two, especially since high-income families are responsible for a third of all consumer expenditures. “By keeping the tax rate lower, that spending support remains for the economy,” he said.
Another panelist, Bruce R. Cohen, CEO of Chicago-based Wrightwood Capital, lobbied strongly for the return of the CMBS (commercial mortgage-backed securities) market. “It will be back.” Pooling loans into cash flow so that they can be rated and sold is a vital function of the market, he noted. “It won’t be $200 billion like it was at the peak, but we’ll see it at $40 to $50 billion, which is plenty.”
Michael F. McRoberts, national head of production and sales for the multi-family segment of Freddie Mac, said the quasi-government lender has been active in Central Virginia. “We’ve done $400 million in lending in Virginia this year, with the average loan size about $15 million.”
He said Freddie is bullish on the area, because military defense spending helps keep Virginia’s economy stable. The impending closure of the U.S. Joint Forces Command in Hampton Roads, which employs 6,000 people in that region, has caused some concern, he said. “We’re following that and the fallout from the BRAC moves carefully, but we’re pretty positive about the market,” he said.
Following three hours of presentations, some conference goers said they were leaving with more optimism than when they arrived. Brett McNamee, a senior vice president for Divaris Real Estate Inc. in Richmond, said her company has noticed an uptick in business over the past eight months. “People are taking advantage of lower prices and starting to open new businesses and to plan expansions.”