What’s the Key to the Commercial Real Estate Market?

What’s the key to the commercial real estate market’s success?

You know the answer to this: a confluence of price, style and design, and of course, location and location and location.

You’d be wrong.

Today’s online future-of-the-market seminar by the Urban Land Institute (www.uli.org) and Ernest & Young focused on the federal government shutdown and Thursday’s deadline for extending the federal debt ceiling.

Regardless of the real estate area—home sales, office rentals, construction, absolutely anything—the panel came back to uncertainty caused by the government.

“The thing the most troubles me on the horizon,” said panelist Richard Moody, senior vice president and chief economist at Regions Bank in Birmingham, Ala., “is the dysfunctional government in Washington.”

After EY presented a survey of 38 economists on indicators conducted from Aug. 27 to Sept. 23, the three-member panel addressed the impact of the prolonged government shutdown and potential federal debt default, and how that changed the projections. And then never stopped addressing the issue.

Moody and his panel colleagues set the tone for the seminar by revising everything downward, and using the word uncertainty repeatedly.

Moody said that the survey’s projected 2013 “slide” for GDP growth—the survey respondents project 1.9% 2013 growth, down from last year’s 2.8%--was conducted and tallied before the DC shutdown.

The result, he said, is that there’s “heightened uncertainty.” Moody added that the “downside risks are now more prevalent than when the survey was taken.”

Panelist Tad Philipp, director of commercial real estate research at Moody’s in NY, picked up on the theme. “The uncertainty thing to me is important,” he said. There is “self-imposed uncertainty over regulation, and fiscal policy uncertainty,” he explained, adding that it makes it hard to plan real estate business moves. “The small business sector is much more harmed in the regulation area,” he said.

Philipp said that the shutdown already has taken half a percent off of the U.S. growth rate so far this year.

Moderator Rick Sinkuler, EY’s global real estate markets leader, summed up the opening by noting, “uncertainty is our enemy,” and it has affected the forecast, which was presented by Dean Schwanke, Urban Land Institute senior vice president.

Among the metrics Schwanke presented at the outset were survey predictions of a projected decrease in office vacancy rates to 15% in 2013, from last year’s 15.4%, and sinking to 13.8% in 2015.

The survey group also saw a slight increase in commercial real estate transactions to $300 billion this year, from last year’s $299 billion, but increasing to $350 billion by 2015. Schwanke also noted that the survey projects a solid increase in housing starts.

The discussion repeatedly returned to the Washington problem and seemed to focus on one word, uncertainty.

Moody of Regions Bank said that business balance sheets are better, there is a lot of liquidity, and credit is cheap. “But the biggest drag on the economy is the government sector,” he warned, “and there is a need for clarity on policy and regulation.”

He concluded, "The uncertainty needs clarification.”

And when asked near the end of the hour-long session about the “headwinds” affecting business, the panelists agreed that federal government’s shutdown and the debt were the keys.

Panelist Paul Mouchakkaa, global head of research and strategy at Morgan Stanley Real Estate Investing in Los Angeles, concluded, “It’s hard to protect yourselves from certain risks. I don’t know how you can totally mitigate yourself from the risks if DC totally shuts down.” He said that closely related to the policy disasters is “event risk: security, terrorism, geopolitical issues.”

Said Mouchakka, “To me I think the biggest risk is that you can try to protect yourself as best you can with inflation, interest rates or financial market risk. [But] there is error in pumped up real estate values, . . . so one needs to be more vigilant in terms of what they are paying in terms of rental rate, what they are underwriting, etc.”

In other words, he summarized, do your due diligence for the risk that is within your grasp to control.

The Urban Land Institute is an 83-year-old global nonprofit member-supported education and research institute based in Washington focused on “responsible use of land and in creating and sustaining thriving communities worldwide. EY is a global tax and consulting firm.

comments powered by Disqus