Industry Takes Stock of Proposed Budget

For the most part, his proposed budget hewed to that line. Forexample, the Department of Housing and Urban Development portion ofthe budget will total about $41.6 billion, or a 5% reduction from theprior year, in operating costs. However HUD is not pulling back thatmuch from its affordable housing commitment, at least according toinitial impressions. It has said it expects its income in the form offees from the Federal Housing Administration and Ginnie Mae to morethan double this year. At the same time, HUD is also proposing a $1.4billion spending increase for its low-income housing voucher program.

Another area of interest to commercial real estate--or perhaps moreaptly put, the main area of interest--is Fannie Mae and Freddie Mac. Unfortunately for commercial real estate companies that rely on their financing, the White House has had little to say on this, despite statements and published rumors last year that the two agencies were due for an overhaul. The closest clue comes form HUD Secretary Shaun Donovan, who has told reporters a plan is coming "very shortly." In the meanwhile, the credit line extension the Obama Administration made to the agencies late last year to near unlimited levels remains in place.

President Obama is also proposing to redirect $30 billion of TARPfunds to community banks, which will be lent out to small businesses--a category that also could include real estate investment.

Of course, it is too simplistic to say that beyond these line items--and of course, certain legislation in Congress such as the proposedoverhaul of the way foreign investment in real estate is treated--the commercial real estate industry has little concern about whatemanates from Washington. The financial system overhaul, for instance, is not specifically aimed at real estate companies, but they will be feeling its impact directly, and quite heavily, depending on the final version of the bill.

While its ultimate shape will depend much on the legislative process,agencies will be playing a key role. The Obama Administration isincreasing FDIC's footprint in this budget, with a proposal toincrease the size of the insurance fund that repays depositors infailed banks. More than likely this will lead to larger--possiblymuch larger--fees required by banks. One study suggested an increasecould be as much as $38 billion in the aggregate.

Banks are certain to protest, as likely are their end customers whowill be indirectly sharing in the cost. Love it or hate it, though, the silver lining to the budget, some will argue, is that it adds clarity.

One of the largest overhangs that has been causing portions of capital to sit on the sidelines has been uncertainty and the unpredictability of the regulatory environment, says Neal Elkin, president of Moody's/REAL. "To an extent that the recent budget disclosure adds clarity to where the government will be regulating, controlling or supporting the commercial real estate marketplace, than that will be positive," he tells GlobeSt.com. "That will allow the market to find appropriate clearing levels."

Finally, there is the issue of the government presence--literally. The DC area relies heavily on its stabilizing force, with varioussubmarkets in the region becoming winners and losers often overnightdepending on the political fortunes. For example, while Obama has notabandoned his concept for health insurance overhaul, it is clear thata significant change will not be coming any time soon--to the dismayof suburban Maryland where landlords had hoped to house expandedgovernment functions in that area.

On the other hand, it is never safe to place bets on what seems to beapparent, says Ed Feiner, a Perkins+Will principal in the DC office."My own experience in and out of government over many cycles andadministrations has reinforced my opinion that when agency budgets arefrozen or reduced, spending moves away from capital projects and movestowards funding from operations accounts."

In other words, he tells GlobeSt.com, capital projects are delayed orcancelled and leasing is often utilized to satisfy a legitimate need."In effect, that avoids the actuality or appearance of big spendingand stretches out the expense over time. There are many opinions as to whether that is 'best value' to the taxpayer but it often the only way to get things done. So regarding commercial real estate, there may be a significant increase in short and long term government leasing as agencies need additional space or space in different locations."