Stimulus: Possible Help, No Panacea

"To the extent that it generates employment and economic growth, it is good for real estate on the fundamental side," says Guy Johnson, president of Irvine-based Johnson Capital, when asked to comment on how the Obama Administration's economic recovery plan might affect commercial real estate. He says that it's too early to tell if the plan will work, but if it generates jobs, it will help the office and apartment sectors most because job growth is an important driver of office and apartment demand, Johnson says.

Besides the jobs picture, the other main concern in today's economy is the lack of liquidity, Johnson points out. Thus far, the economic stimulus plan hasn't been all that effective in stimulating lending because many of the banks are stockpiling their money and putting it on their balance sheets, almost as a contingency against future losses, Johnson says. "They haven't been aggressively redeploying that money to the borrowing community. They have been sitting on it, trying to protect their balance sheets," he notes.

Both Johnson and Richard Green, director of the USC Lusk Center for Real Estate, point out that getting the credit markets flowing again is important because of the large number of commercial real estate loans that are coming due and will need to be refinanced. "If the Geithner plan works, which is a big if, what you'll see is that lending will come unstuck," Green says. However, he adds, "If banks start lending again, that doesn't mean that commercial real estate is out of the woods because there's an issue with what's happened to property valuations."

Green doesn't see any direct impact of the stimulus plan on commercial real estate, except that if consumers start spending again, the increased spending will be good for the retail sector. On the other hand, Green describes his overall outlook for the retail sector as "gloomy." He doubts if demand will pick up enough to justify the new retail space that has been built, let alone most future development. "For future retail development, it's going to be considerably slower,"Green says. "There will be certain locations where new retail space is needed, but we will see a substantial slowing of retail development in years to come."

Green is more optimistic about the apartment sector, pointing out that although the sector is feeling the effects of the recession, "We haven't built that much multifamily housing in the last 15 years, so I feel that sector will do pretty well, regardless of whether we have a stimulus plan or not."Regarding the office and industrial sectors, he says that the stimulus "could help to bring them back a bit sooner" but will not be a major impetus.

One of the questions being asked about the eventual recovery is whether it will be "jobless." Green and other economists point out that in both of the previous two US recessions, there was a lag between the time the economy began to improve and when job growth resumed.

Green thinks that hiring could conceivably start a bit sooner in this cycle, once the recovery begins. "It seems to me there is going to be a need to hire government workers"to implement parts of the stimulus package, particularly the roughly $800 billion in loans that the government is talking about. In addition, Green points out, "Consulting firms and others who are involved in portfolio valuation are going to have to start hiring eventually." It's not going to happen next month or even in the next few months, it will need to happen sometime, he explains.

The jobs question, obviously important throughout the US, is especially acute in California, where some forecasts estimate that the state's unemployment rate could climb to between 12% and 15%. The state also continues to struggle with budget problems that prompted Gov. Arnold Schwarzenegger to order unpaid furloughs for many California government employees. Jobs are one of the most important elements in the recovery picture for commercial real estate, Johnson Capital's Guy Johnson points out, because, "Anything that would stimulate the economy to provide job growth is ultimately good for most forms of real estate ownership." Whether those jobs will materialize, and whether the Fed's plans will have much to do with their formation, remains to be seen. "Stay tuned," Johnson says.