HOUSTON-On January 1, 2013, there could be problems larger than a hangover headache or queasy stomach. Those problems will involve the so-called “fiscal cliff,” a component of the Budget Control Act of 2011, which launches a mass of spending and tax cuts if Congress does nothing between now and then.
This aspect, known as sequestration, will launch $600 billion cuts in defense spending and $600 billion in domestic spending. And it goes without saying that those spending cuts will have an impact on the economy in the form of higher unemployment and lower GDP. It’ll also have an impact on commercial real estate, which is just starting to recover from the Great Recession and its aftermath.
Sandy Paul, national research director at Delta Associates, the research affiliate of Transwestern, writes in the firm’s Q3 2012 “Insights, Trends and Opportunities” report that the fiscal cliff would be problematic for commercial real estate investors in the short term, as it would lead to reduced income streams and depressed property values because of higher vacancies. In the long term, however, reduction in annual deficits coming from sequestration could lead to lower interest payments, which, in turn, could lead to greater investment domestically. This could also attract foreign interest in U.S. commercial real estate assets, driving up pricing.
But there is little doubt that, in the short term, sequestration will end up having an impact on commercial real estate, in the form of increasing vacancies as companies put off making decisions. And Paul tells GlobeSt.com that sequestration would impact both the office and industrial sectors.
“Consumer spending makes up 70% of the GDP, and anything that impacts employment negatively will have a downward pressure on consumer spending,” explains Paul, who works out of the company’s Alexandria, VA-based office. As lower consumer spending means lower demand for products, owners of warehouse and distribution facilities will feel the brunt of that issue.
Furthermore, the ramifications of sequestration won’t happen in a trickle-down way. Rather, they’ll occur at once. “A lot of office tenants that might want to expand would put those expansion plans on hold because of uncertainty about what might happen,” Paul says.
Paul went on to say that many of the vacancies – office and industrial — will rise or fall depending on geography. “Some markets will do better than others,” he comments. “For example, the Houston industrial market has a low vacancy rate and it’s likely to stay low, in part, because of the Panama Canal expansion and more Asian products coming into and going out of Houston.” But other regions don’t have those positive indicators.
Paul also points out that there is enough of bipartisan momentum in Congress that could prevent any of this from happening. “Neither side likes sequestration,” he adds. “There will likely be some kind of lame-duck legislation forestalling the impact of sequestration. There’s almost universal agreement that it would be bad for the economy.
|If nothing is done in Congress before 2013, the fiscal cliff and sequestration will move from rhetoric to reality. Look for a decrease in GDP, an increase in unemployment — and a serious impact on the commercial real estate community.|