GlobeSt.com and its parent, Real Estate Media Network, hosted  “The U.S. Economy Crisis and Cures,” an economic briefing today with top economists from Ernst & Young, Moody’s, the Federal Reserve Bank of San Francisco, CB Richard Ellis and Marcus & Millichap to discuss the current economy and its impact on the commercial real estate industry.  Following are highlights of the presentation:
 

• The general consensus is that we are experiencing a crisis in confidence, not a crisis in market fundamentals.  The numbers indicate a mild downturn, not a recession.
  • The economy has been steadily contracting since December 2007, with housing and the financial sector the leading indicators.
  • Though we haven’t yet met the definition for a recession (two consecutive quarters of negative GDP), the overall impression is that of a slowdown, impacting nearly all sectors
  • The downturn is in line with expectations and less severe than previous recessions

• To date, job losses have been smaller than in previous recessions (notably the 1991 and 2001 recessions), leading to a less severe employment situation
  • The slower economy is typically attributed to six straight months of job losses, the continual plunge of home prices, and the impact of the credit crunch (particularly the rise in the risk spread)

• Economists agree that the last two quarters of 2008 will see a slowdown or drop in economic productivity, and that recovery will pick up steam in 2009
  • A poll taken during the webcast found the majority agree that the economy will improve by the third quarter of 2009
  • Headline inflation is likely to spike again in the short-term, and will slow in 2009
  • Inflation rates are expected to rise, as the Federal Reserve is challenged with issues on both the economic growth and inflation sides of the equation, and economists try to gauge how prices and wage pressures are going to hold up with increased inflation
  • The economy will reset to where we were in 2004, as opposed to the boom years of 2006 and 2007

• In overall terms, the financial sector is demonstrating its strong fundamentals
  • Underwriting for loans and mortgages has normalized, returning to how it was before the real estate bubble, mostly due to the Fed stepping in
  • Financing is available, but if you can get credit it is more expensive
  • This change in underwriting has tremendous implications for economic growth and recovery, as access to new capital is a key factor in growth

• The commercial real estate market will see an increase in vacancies of 1-1.5 percentage points, but that increase is on a fairly healthy supply base
  • The market is in for some erosion of its fundamentals, as the economists are keeping a close eye on sublease numbers
  • Most expect to see weakness, not a hit, in market fundamentals
  • The industrial market is strongest overall, followed by office.
  • Existing CMBS is in very little distress, though 25-30% of today’s commercial debt comes from the CMBS market
  • The psychological aspect of the downturn comes into play with leasing demand, as most investors are sitting on the sidelines waiting to see where the market will go, and job losses will be way below trend
  • Prices have adjusted downward by approximately 15%

• Economic recovery will come from a stabilization in energy and food prices, and establishing a new balance for the economy
  • The ‘dull’ downturn will have a ‘dull’ recovery, and will take another year to play out

 Gail Heist
NAI Kowallis & Mackey
www.NAIBoise.com