NEW YORK CITY-On the heels of Standard & Poor’s downgrade of US debt and a week-long rollercoaster ride in the American stock markets, the commercial real estate industry continues to look for clues about what to expect next. It’s made the most recent Global In-Sights podcast from CB Richard Ellis, “US Debt, Deficit and Real Estate,” timely and reflective of the changing nature of the events.
The podcast, hosted by global chief economist Raymond Torto and head of research Asieh Mansour, both of the global research team at CBRE, looks at the effect of recent events on commercial real estate.
First up, is the downgrade. Torto and Mansour discuss why it occurred. “The downgrade itself was not a surprise,” Mansour says, before outlining the three reasons that she believes it took place.
“Growth prospects for the US are deteriorating,” she says. “All of us, as economists, as professional forecasters--we’ve been hoping for a second half rebound after some temporary factors during the first half of this year.” Those did not materialize, she says, adding that nonetheless she doesn’t believe that we’re going to fall into a recession.
“The second is clearly the unwillingness that we all observed from policymakers to make a grand compromise,” Mansour says. “I think S&P had warned the US that if they do not at least cut the deficit by $4 trillion over the next 10 years they may face a downgrade. So the $2.1 trillion that we got, that resolution really fell short of a more comprehensive resolution.”
The last factor leading to the downgrade, in Mansour’s eyes, was the trajectory for the US debt picture--so it reflected concerns for the future, and wasn’t necessarily a comment on current conditions. “The reality is that the US deficit and debt picture is really downgrading,” she says.
Torto says that he believes that recent upheavals reflect the realization that monetary policy has inflated prices, while having little success stimulating the economy. “We’re sort of in stall speed,” he says, “given the 0.9% growth that was had in the first half of the year.” Torto says that the turmoil is about “people realizing that this monetary policy hasn’t worked on the monetary side.”
“There was plenty of demand for Treasuries, so people were willing to buy US Treasuries even though the credit rating was dropped a notch,” Torto adds. “On the other hand they were not willing to buy equities.” Torto believes that this points to the downgrade as being a reflection on the economy rather than “the full faith and credit of the United States.”
Another point of interest in the podcast: the role of foreign investors moving forward. “For a lot of investors--this is a good entry point for them,” Mansour says. “In practicality and reality US commercial real estate is for sale for foreign buyers. So it’s a great entry point for cross-border investors.” She adds that real estate, as an asset, is a better hedge against anticipated inflation going forward.
Consensus among the two is that the downgrade is not a major factor moving forward. What is more troubling, they say, and more likely to have an impact on commercial real estate, are the economy’s underlying fundamentals, a concern echoed to GlobeSt.com by other experts. “It becomes a non-event in the near term,” Mansour says. “The focus longer term is going to be underlying economic fundamentals and underlying growth trajectories for these markets—and that’s going to be key to commercial real estate.”
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