SAN DIEGO-Uncertainty over several key factors—including the looming “fiscal cliff” and stubbornly persistent Eurozone crisis—is perpetuating today’s sluggish economy, according to speakers at a recent Trigild Lender Conference here. As GlobeSt.com recently reported, these factors are keeping the business cycle frozen and call for a real plan in order to restart the economy.
According to Robert Guest, business editor for The Economist, who spoke at the conference, the US is facing a double whammy: “an increase in taxes and cuts in spending,” which could send the economy into another recession. The only hope is if the “Democrats and the Republicans can compromise. The cliff is so bad, hopefully they will not drive over it.”
Sam Chandan, Ph.D, president and chief economist for Chandan Economics, said that “the potential impact of not resolving this problem presents a real risk.” He added that American companies have “no idea what will happen and are sitting on an enormous cash pile.”
While corporate profits should go into growth and expansion, because of uncertainty they are not. “Two years ago, it was lack of credit that was hindering the economy and growth; today it is uncertainty,” Chandan summed up. While corporate profits are strong, “the American people got left behind. Corporate profits are not being reinvested or reflected in the job market.”
Guest added that while he is bullish about America if we can solve the fiscal cliff problem, the “markets need a credible, medium-term, gradual plan to regain fiscal footing.”
Understanding risk but not measuring it is a serious problem with regard to commercial real estate, Chandan pointed out. At the onset, “everyone underestimated the nature of the problems we faced. We have made breakthroughs in the ability to understand risk, but not to measure it.” With this in mind, the value of commercial real estate assets is rising at a faster pace than the economy is improving, and we are now “at risk of bidding too aggressively and paying too much.”
Also, while the commercial real estate recovery is in full gear, it is uneven. “Bifurcation is still an apt description in too many markets,” said Chandan. “Capital is not spread evenly in asset classes, but clustered in certain parts of the market.”
Too much money chasing too few deals—particularly in top markets such as New York, Boston, and Los Angeles—is a continuing problem. “Investors want to be in liquid markets where assets are tradable,” said Chandan. “Too many investors are focusing on core assets in gateway markets, and as a result prices are rising because capital is flowing in with force.”
Historically low interest rates are also fueling the commercial real estate boom, he said. “Low interest rates are our drug of choice. Weaning ourselves off this drug is not painless, but necessary.”
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
