Economist: Local Change, Muted in Comparison

Dunkelberg first set the stage for the audience of approximately 500 by providing a visual tour of what's currently happening in the US economy. He first pointed out that much of the problem in today's economy is that "we now spend more than our after tax income. We do this by using credit…we are borrowing lots of money." He explained that for quite a few years, there have been far more houses built than people to fill them. "It's like musical chairs with too many chairs. This is an underlying asset that's behind all the mortgage-backed security problem."

He noted that "the credit crunch is not on Main Street, it is on Wall Street." He also said that "inflation is picking up as a concern for small business owners, and that's not a good sign. That's what everybody is worried about the Fed's losing sight of." Dunkelberg further explained that the Fed's announcements have also had an impact on the economy in terms of expectations. "Just before the fed cut, according to a survey I conducted back in September, virtually one in four business owners thought the economy would keep getting better. Twelve days later, it went down to 5%...the fed scared everybody to death and everybody panicked." Losses are really big, Dunkelberg said. When banks loose money, "it impairs their ability to fund many projects." Lower interest rates will not help our market today he explained. "The irony of this whole thing is that we are solving the problems of cheap credit by adding more cheap credit. Can the Fed's manage its way out of that?" he queried.

Dunkelberg said that "we started getting notices from the Fed about the possibility of overbuilding and overextending a year ago, but not in the residential market. They were warning us not to get too levered up in the construction and the commercial real estate, so they kind of had the right idea, but the wrong product," he said. "I think commercial investors really don't worry as much about whether you are in a recession at the moment because it will take you two years to get a commercial site built anyway…you are always looking to the future." He explained that on the commercial real estate side, things have remained fairly strong.

Dunkelberg predicted that growth in our economy is still going to be pretty solid in the larger term. "We are trying to figure out where the growth is going to be," he explained. "Right now, growth is very heavy in the south and southwest. It's not a great place to be in Ohio. Texas has added 1.2 million new jobs. Commercial construction in Florida is doing well."

Fitzgerald

Fitzgerald noted that the supply and demand cycle is getting out of balance, consumer confidence is at a 16-year-low, and "you have over-financing and when those stars align, you have a recessionary environment in commercial real estate." You have overbuilding, which seems to happen and hyper credit, which always seems to happen." He further explained that "if you looked a year ago in the CMBS markets, you had securitized lenders lending 80 to 90% on 100% vacant facilities across the country at non-recourse…also at fixed interest rates. It's out of balance. The thing that's going on today, a year later, is that we are back to a normalized or standard underwriting procedure. The people lending into these value-add situations are the commercial banks. For a long period of time, people were used to underwriting their facilities with fixed-rate debt and that's not the case anymore."

He said that if there is a piece of good news, it is that "we have that there's a slowdown in the market for space, but deals are still getting done. Users who have been into the market have been in a situation where they need more space or a new lease, but need a higher level of approval. Leases for example are still getting signed, but it is taking longer for transactions to get done because everyone is now being mindful of that next expenditure."

When asked where the best bet is to put money, Dunkelberg said that on the residential side, he would look to distressed water properties. "Other than that, I would have to start looking at where the growth is going to be. Perhaps the outskirts of Philadelphia to see where the new centers are coming in and where the population will be and be there and invest in that."

Fitzgerald said that his strategy is to look for assets that have a short-term rollover. "You need to be able to carry a property through two or three years of lease-ups. You are buying at prices that are 15% less than last year, but you need to make sure you can weather the storm.

Dunkelberg said that buying existing assets doesn't grow this economy. "What we are interested in is; are you going to build new ones, and I think that is what's going to be depressed for a while."

As far as what to expect for Philadelphia's future, Fitzgerald said that it is important to "figure out a way to make yourself competitive relative to the competition. If we find ourselves aligning with our competition, what can the city do relative to those competitions so that people want to move here and so that businesses want to locate here?" He said that "it is important for the brokerage industry to get the deals done that you can get done today."

Dunkelberg said that "what's good for our region is the structure of our business sector. It is very professionally oriented. The growth with the local Universities provides great economic growth as well. "I am optimistic about the next four to eight years with the Mayor. …We can't change the reputation of Philadelphia in a year, but it will happen. We do have a stable economy, and that is something that not a lot of cities have. The Philadelphia economy change will be muted compared to the rest of the economy."

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Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.