NEW YORK CITY-The question no longer is what will happen to the economy if we factor in Iraq. The question should be what if we don't. That's how certain Mark Zandi, chief economist for Economy.com, is that war will happen. But war may actually bring about certain spurs to the economic environment, Zandi told a gathering Wednesday. In fact, he was less enthused about the impact of President George Bush's stimulus proposals on the GDP. In a presentation before the New York Chapter of the Counselors of Real Estate, Zandi discussed the war, the proposals and the GDP–and predicted how these would impact real estate in the long term.
The economy is actually growing, he noted, and the underlying fiscal conditions are good. Growth is simply not occurring fast enough to create new jobs. As a result, “investor, business and consumer confidence is flagging, and it is all tied in to the pending war.”
Those positive underpinnings include resilient productivity growth and continuing benefits from equipment, software and space investments made around Y2K–remember that? Additionally, since “the economic life of those Y2K investments is now eroding,” he said, “businesses are under pressure to re-invest.” Of course, low interest rates were also credited with “keeping the economy together.”
The war with Iraq–which Zandi believes will be a short and shallow event–and victory both seem a foregone conclusion. The war, he said, “will be cathartic, and then we'll see oil prices start to lower. Plus, success there will be a catalyst for improved confidence.”
More debatable is the newly proposed economic stimulus program laid out the other night by President Bush, a plan Zandi termed “reasonably good.” A “mélange” of tax cuts would deliver some $100 billion in total savings in the first year after implementation, and the elimination of taxes on dividend income sounds like a boost.
In fact, he stated, the Democratic program will actually work better, with its $160-billion influx, its temporary structure and its inclusion of “significant aid” to state governments. The elimination of dividend taxation is “neither here nor there for the economy either this year or in the long run. Why? While it has its benefits, it creates deficits, which means higher interest rates. As a result, we will be no better off in 10 years than we are right now.”Zandi believes that the ultimate stimulus legislation will be a compromise. Laying the three plans side by side, he noted that while Bush's package would fuel 2.5% GDP growth in '03 and 3.4% in '04, the Democratic vision would produce 2.9% and 4% in those same years. The compromise would generate 2.6% and 3.5%.
What does all of this mean for New York real estate? Zandi said the first property type on the comeback trail will be warehousing, a result of business confidence growing. We should see signs of life there late in the summer. Next up will be apartments, set for an upswing this time next year as it rides the crest of rising interest rates. Late '04 will be the office sector's long awaited time to shine. It will take that long, said Zandi “for the bleeding to stop” in investment banking, financial services and media. Bringing up the rear will be retail, which while posting positive numbers nationally, will not enjoy significant absorption until consumer confidence builds some more. He gave no timeframe for the upswing in retailing.
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John Salustri
John Salustri has covered the commercial real estate industry for nearly 25 years. He was the founding editor of GlobeSt.com, and is a four-time recipient of the Excellence in Journalism award from the National Association of Real Estate Editors.
