The US Real Estate Market Should Be Fine
The current turmoil may turn out to be good news for real estate investors in the US. Europe is in for a very tough ride for years to come. There are no good answers and the Euro is on its last legs. The Euro never really made any sense in that you simply cannot merge Greek and Italian cultures with Germany and the Nordic countries. They are different countries for a reason and to think you can merge their monetary systems long term was quite simply, foolish. The Europeans will continue to try to save the system, but in the end it has a good chance of coming apart. The Germans and the Dutch are not going to use their hard earned money to bail out Berlusconi and his antics, nor the failure of Greeks to pay their taxes. Why as a good tax paying German would I do that.
The S&P action was not a surprise to anyone, and it is really just a political statement, and not a reflection of the ability of the US Treasury to pay its interest and roll its debt. At least in the short run. There is complete lack of leadership in Washington, and a dysfunctional government, but at least the Tea Party did force everyone to start to deal with the issues that we have all known about for many years-entitlements. Tea Party solutions may be dumb, but someone had to really shake up the system. Maybe in November they will actually do something productive.
The economy will be slower than we all thought. Lease up will take longer and rents will not rise as much as hoped. Lenders will be more cautious, but rates will remain low. However, this is not 2008. The world did not end in the US. The US banks and major corporations are in very good balance sheet condition for the most part. The over levering of investment banks and others is pretty much out of the system. Servicers have gotten their act together and are getting on top of processing the problem properties. There is a long way to go but the complete disaster we all though could happen did not.
So for US real estate in major markets, there is likely to be a lot more European and other money flowing here to invest. They are not going to want to sit with zero return on Treasuries forever. A good piece of US real estate with a reasonable cash flow is a good place to be in this world. With the dollar so down, buying US assets is a reasonable trade. While prices in New York and a few other markets are out of line already, that may adjust now, but it is still good real estate and good cash flow. I would expect Washington DC real estate to begin to decline in value as the government starts to get serious about cost reductions and cutbacks and then sales of assets.
With rates at all time low, and now pretty sure to stay there for probably another year or more, cash flows on good assets should remain solid for a couple for a couple of years. I think that projecting huge value jumps over 4 or 5 years is hard to do since there is so much we cannot predict, so current cash flow is probably what is most reasonable to be looking to. Solid office assets, good newer hotel assets in all markets, multifamily in many markets are all assets worth acquiring. Newer hotels will be good because the older ones will not get the renovation funding to be competitive and they are already well behind schedule to upgrade and so will not be able to compete with new, well branded product. Retail is very risky because it is faced with the dual issues of slow retail sales for a lengthy period and online shopping now becoming a major force. Multi is going to stay good so long as there is not too much new development because it will remain hard for many people to get a mortgage and foreclosures will continue to push millions into renting for several more years.
The outlier is Europe. It could potentially be Lehman revisited, but more likely the Germans and French will do what they need to and the US Fed will help that effort. In the end there will be a deal in Washington for $4 trillion or some number like that and there will be some move to tax reform and entitlement reform. More importantly, November 2012 is only a little over a year off and we have some hope that we may get a president who is at somewhat knowledgeable about business and not a community activist who views al of us as fat cat bad guys who should be heavily taxed to transfer our hard earned wealth to all of his constituents.
Everyone needs to take a deep breath. This is nowhere near the potential collapse of the banking system we faced in 2008. That was a real crisis of historic proportions. Rates will remain calm and low for a long time. US real estate will be fine. Europe will continue a disaster in the making. Lenders will be more cautious, but they will come back into the market soon so long as the mortgage bond market revives. Life will go on. If you survived 2008, this will not be that bad.