There is no doubt that we are living in a time when there has never been a more closely tied relationship between politics, economics and real estate. In fact, the unprecedented level of government intervention has had profound implications for our real estate fundamentals. This has been true for both the residential and commercial markets.In the residential market, the impact of government intervention could not be clearer. The government’s initiative to increase the homeownership rate in the U.S. from, the almost-equilibrium level of, 62% into the high 60s has been front and center. This one initiative, which created a platform to put people into homeownership who could not afford to own homes, provided the shove off the cliff for Fannie Mae and Freddie Mac, leading them into insolvency. The mandate to put people into houses that the could not afford to own them forced the GSEs to loosen their standards. They would buy almost anything in sight which encouraged banks to originate mortgages to anyone with a heartbeat. How could they possibly substantiate making those infamous “ninja” loans? You know, no income, no job, no assets……no problem. A strong case can be made that this one initiative was the tipping point for our current financial crisis, setting the stage for participants in the marketplace to do what they do best when opportunities present themselves. .Today, the government is the most important influencer of the residential market. Between Fannie, Freddie and FHA, the government now guarantees approximately 92% of all single family mortgages in the country. Moreover, the government purchases most of those mortgages and keeps interest rates low by having the Fed purchase most of the mortgage backed securities and treasuries that are offered for sale.The first time homebuyers tax credit (which has been expanded to include some non-first time buyers) has created a very unusual dynamic. The average home price in the U.S. is presently about $178,000. Most buyers are getting FHA loans today which require only a 3.5% downpayment. This amounts to $6,200. The tax credit is $8.000. So essentially, the government is handing buyers a deed and a check for $1,800 and saying “Go for it”. Haven’t we seen this movie already? If housing double-dips, it will not be a surprise.In the commercial sector, government intervention has, again, played a leading roll. In order to get the credit markets unfrozen, TALF was expanded to apply to commercial real estate in the hope that it would stimulate the secondary market. The PPIP was created to essentially achieve the same objective. While neither program produced nearly the direct results that were expected, they served a useful purpose in that their sheer existence brought credit spreads in, helping to thaw the frozen markets.However, the best thing that can be done for commercial real estate is for the government to focus on job creation. The relentless pursuit of other unpopular agenda items does little for CRE and, in fact, hurts our market. Job creation will help fundamentals get back to the point where we will see occupancy rates rise and rent levels increase. When I mentioned this at a conference I was speaking at recently, one audience member stated that when it comes to job creation, “We can’t expect the president to be a miracle worker”. Miracles we don’t need; just a little focus and some strong leadership.A tax policy that can be relied upon would be a good start. Within the past two months, for instance, we have heard that the Bush tax cuts will be extended, that they will sunset and that they will be extended for some Americans but not for others. Is your head spinning too? Without anyone in Washington (on either side of the aisle) being able to show political will to substantively cut spending, how can we be lead to believe anything other than the fact that our taxes will rise significantly? Uncertain tax policy has been one of the major reasons employers give for not hiring, even when a current need exists.Another job creator would be consumer stimulation. Why does the government increase taxes, process those dollars through an inefficient machine that removes some of the money in the form of waste, fraud and abuse, and then doles out what’s left in the form of entitlements and bailouts? Why not just cut taxes and have 100% of the money go directly to the consumer? Tax cuts have worked effectively in the past and both parties have used this tool. Not only did Ronald Regan use tax cuts to stimulate the economy but so did JFK. Few people remember that.The president claims that doubling our exports would create over 2 million jobs, yet three trade agreements have been sitting on his desk since he took office with no attention given to them. It is unlikely this will change until after the mid-term elections (if ever) as union support is critical for this administration and organized labor does not favor free-trade. This is unfortunate as free trade agreements help open markets and expand opportunities for American workers and businesses as they can enter and compete more easily in the global marketplace.Spending on infrastructure would seem to be another area in which job creation could be attained. Only 11% of the $787 billion stimulus was targeted towards infrastructure and much of that money has not been deployed yet. The idea of forming an Infrastructure Bank has been discussed which would create a public/private initiative to build, augment and upgrade the core infrastructure in the U.S. which is greatly needed.  People point to “green jobs” as a possible answer. Thus far, the results have been disappointing. $5 billion of government money was allocated to weatherization programs with the intention of putting as many as 87,000 workers back to work “right away”. Many of these workers would presumably be in the construction industry, a sector in dire need of assistance. Thus far, only 2 of the 10 highest funded states have completed over 2% of planned units. In New York for example, we finished a whopping 280 homes out of the planned 45,400. California competed 12 out of 43,400 and Texas was unable to get anything done out of the 33,908 they had planned. Those three states have a total population of about 80 million and only 292 homes have been weatherized, hardly making a dent in that 87,000 jobs number.  The biggest concern participants in the commercial real estate market should have is that we are now so closely tied to government intervention and policy. This is scary. The track record of Washington’s policy making and initiatives (created, implemented and overseen by both Republicans and Democrats) has been far from stellar. The U.S. post office was established in 1775 and is now insolvent. Social security was created in 1935 and it is insolvent. Fannie Mae was established in 1938 and it is insolvent. Medicare and Medicaid – insolvent. Freddie Mac – insolvent. The Department of Energy was formed in 1977 to lessen U.S. dependence on foreign oil. Since then, the department has grown to 16,000 employees with an annual budget of $24 billion. The result is that we import more oil than ever before. Is it any wonder that only 35% of Americans want the government running a business which represents 1/6th of our economy?Simply put, Americans are concerned today. Concerned about government spending, taxes, deficits and where we will be in 5 years or 10 years. These concerns impact hiring decisions and consumer spending. And those things greatly impact the fundamentals of commercial real estate. Clear direction and sound policy would go a long way towards normalizing things. We all want our market to recover as quickly as possible. Let’s hope it happens more quickly than we expect.Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career.

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