I’m preparing for next week’s unveiling of Emerging Trends in Real Estate 2010 at ULI in San Francisco. I won’t be giving away the store to say next year won’t be the greatest in industry history… I know audiences don’t want to hear all gloom and doom (who needs to sit through a downer?), and there will actually be some positive things to say. But can anyone feel good about where the economy is headed right now and especially the jobs outlook?
One of my colleagues, who knows I’m a glass-half-full-kind-of-guy wants to showcase an upbeat view and argues with me that the last six months of outsized stock market performance is a leading indicator of better times ahead and the “statistical” economic recovery is more good news. Certainly, the economy has bottomed and companies are producing better results by comparison over a year ago’s dismal performance. This has been accomplished in large part through productivity gains—slashing jobs and occupancy costs. And finance stocks have bounced part way back thanks to government infusions and trading gains off market lows. But hate to say it, government prognosticators, who always look for a silver lining, are certainly under-promising in recent pronouncements—they see unemployment continuing to increase well into next year even with stimulus spending having an increased impact on creating new jobs.
And although the stock market, in fact, did its usual good job in predicting the end of recession with a six month performance spike, the surge appears to be over unless companies show they can ramp up production and their markets start buying again. Now stocks shouldn’t collapse, but it looks like they’re sputtering—the dollar slide, the prospect for higher interest rates in the future, state and local government cuts, and long-term consumer and government deleveraging don’t paint a rosy picture. The recent increase in house buying has been helped along by government tax credits and the cars for clunkers program temporarily boosted the automakers. The rate of jobs losses ebbs and more companies finally will start hiring next year as inventories need to be restored. But do we think the economy can stand on its own without all the government supports? For an answer, Congress extends unemployment benefits and considers extending the home buyers’ credit. Most realtors think home sales could go into a winter deep freeze without the tax break.
And then there are our in-full-scale-free-fall commercial real estate markets, which every week help to take down more community and regional banks. Capmark, aka GMAC Commercial Mortgage (a former employer of mine), once the largest commercial real estate lending organization, finally entered bankruptcy over the weekend. In 2006, two private equity firms (Five Mile and KKR) bought a majority interest in GMACCM and did what private equity firms do—gutted the company of employees (productivity gains) and heaped on debt in a bond refinancing (to pay themselves an early return on their investment). These investment playmakers ran out of time to make their planned highly profitable (for themselves) exit in an IPO when the market collapsed—and ended up with the worst of both worlds—an overleveraged debt business that had lent too much just before the market cratered. And now we wait anxiously for the inevitable--more Capmarks and more Peter Cooper/Stuyvesant Towns.
So to put a good face on what’s happening--the economy may be at the start of recovery after bottoming. But that translates into things can only get better. And right now that’s still not saying much.
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