Tragedy in Japan Adds Another Layer of Risk
The most important impact of the tragedy in Japan is of course the human toll. With thousands of victims and displaced individuals, the impact will take time to fully assess. Assessing the economic impact is also is a moving target given the unknown outcome of the nuclear power plant disasters. However, assuming the direct and indirect worst-case scenarios are avoided, the global economic recovery may be challenged but should continue. Relief and reconstruction efforts, including international aid, will be positive humanitarian and economic factors that could have many lasting benefits.
What will the crisis in Japan mean for real estate investments in the United States?
GDP: In 2011, we still expect U.S. GDP growth of approximately 3% and job growth of approximately two million, or 2%, with accelerated growth in 2012 as confidence returns to the marketplace. Japan represents a relatively small percentage of our exports (just 5%), and any reduction in demand from Japan right now will likely be significantly offset by increased demand, particularly for building materials and equipment, later this year and into 2012 .Reduced production of some Japanese products over the next six to 12 months (or perhaps even longer) will also temporarily increase market share for U.S.-made goods, in particular automobiles. To the negative, however, will be some supply shortages, particularly semi-conductors and electronic components, as well as automotive parts. It is noteworthy, however, that Japan no longer has the dominance in production it once had. Imports from Japan recently represented only 6% of total U.S. imports.
Real Estate: A sustainable recovery in the CRE fundamentals and investments appears on track, although the pace of recovery could slow if recent events tilt consumer and business sentiment back toward caution. The bigger risk is the cumulative impact of multiple events happening at the same time, especially since the outcome of the situation in Libya is unclear and unrest could still spread in other Middle Eastern countries.
Oil: Greatly reduced demand for oil in Japan has brought down the price by $5 per barrel, or 5%, since the earthquake. Before the earthquake, climbing oil prices were viewed as one of the greatest short-term risks to the economic recovery; that risk now appears to be greatly diminished. However, the risk of very high oil prices has increased due to unrest in the Middle East, and on a mid- to longer-term basis, due to the possible disfavor toward expanding nuclear energy production.
Debt and Japanese Investments: Japan is the second-largest holder of U.S. debt behind China, and Japanese investors hold significant investments in this nation. If Japan decides to divest of Treasury bonds or U.S. holdings to rebuild, it would have a negative impact on interest rates in the U.S. and on various markets. This is highly unlikely on a large-scale basis as it would potentially disrupt global capital market and other means can be tapped for Japan’s relief, reconstruction and stimulative spending.
Hospitality: Hawaii, particularly the island of Oahu, will likely take a hit over the next year or two, since a large percentage of its visitors – 18% – historically hail from Japan. This is also assuming contamination will not become serious issues in Japan or elsewhere.
West Coast Industrial: Much of the growth in demand for West Coast industrial assets, primarily those located in Southern California has been driven by trade in the Pacific Rim. There likely will be a modest temporary dampening in demand as a result of the decline in imports from Japan. Two-way trade with Japan represented approximately 17% of the trade with the Los Angeles Customs District in 2010, and this percentage is expected to drop sharply in coming months. However, this will be partially offset by increased trade with other nations such as China and South Korea, as well as by a boost in exports from U.S.-based companies. Also, a temporary drop in trade with Japan will not necessarily lead to a proportionate, concomitant drop in demand for industrial space. The recovery in auto manufacturing and the building materials sectors nationally may accelerate.
Earthquakes and Natural Disasters: Perhaps the most important shift that will occur from the disasters in Japan is that investors may pay increased attention to the risks that various areas have to natural and man-made disasters. This could have a modest-to-moderate impact on property and casualty insurance and prices in earthquake-vulnerable areas, like Coastal California and Seattle, as well as St. Louis. Hurricane-prone coastal areas along the Gulf of Mexico and the southeastern coast, and on large, densely populated cities, including New York City and Washington, D.C., will also face risks. Long-term investment prospects for these areas are unlikely to change substantially if history is an indication.
Investment Strategy: The start of virtually every expansion cycle has had its challenges, including the most recent one which began in 2003. Investors would be well-served to assess risk and how some of the recent global issues may impact individual assets. At the same time, a long-term view on commercial real estate, backed by realistic underwriting and business plans for value creation at the asset level, has outweighed the ‘issues of the day’ more often than not. Values and occupancies have generally bottomed, the economy is growing albeit more moderately than it should be, interest rates are historically low and new supply is not a threat for the next few years. CRE investors should proceed with caution but not overlook the compelling benefits of the asset class at this time in the cycle.
Hessam Nadji is managing director, research and advisory services, for Marcus & Millichap Real Estate Investment Services. Contact him at email@example.com or (925) 953-1700.
For MORE insights on finance trends, check out Ackman Ziff's "Capital, Fueled by Innovation" home page, which provides Thought Leadership positions on a variety of commercial real estate trends, transactions and movement.
About Marcus & Millichap Real Estate Investment Services
Since 1971, Marcus & Millichap Real Estate Investment Services has been the premier provider of investment real estate services. Through the depth of its local market knowledge, the firm has established itself as a leading investment real estate company with more than 1,200 agents nationwide. The firm recently formed Institutional Property Advisors (IPA), a multifamily brokerage division serving the unique needs of major private and institutional investors.