Recovery's Real, But Double-Dip Fears Remain

ONTARIO, CA-Reports of recovery are surfacing throughout the commercial real estate industry, but the optimism they generate is tempered by fears of a double-dip recession and concern that the comeback won't really gain momentum without new job creation. These were some of the main messages presented Wednesday at a mid-year review and panel discussion presented by the Inland Empire Chapter of Naiop. The event, at the Ontario Convention Center, included a keynote by Roger Staubach, executive chairman of Jones Lang LaSalle.

The panelists generally agreed that conditions have improved in their respective corners of the commercial real estate world, which included development, investing, logistics, a new non-traded REIT and investment advisory services. Case in point: EVP and COO Anthony Chiarello of NYK Logistics Inc.―one of the world's largest logistics companies―said that NYK is now hiring but was cutting staff by 15% about 18 months ago. President and CEO Stephen Hopkins of Irvine-based Hopkins Real Estate Group observed that the mood at this year's annual ICSC (International Council of Shopping Centers) spring convention in Las Vegas was decidedly more upbeat than it was last year. "Things are starting to percolate a little bit more," Hopkins said.

CEO Dwight Merriman of Denver-based Industrial Income Trust, a recently formed non-traded REIT that aims to raise $2 billion, said that his company sees opportunities in the current market to buy industrial properties in top US markets. At the same time, Merriman hit on a theme that is recurrent these days in discussions about buying opportunities: "It doesn't appear to me that we will have the same types of buying opportunities today as we did in the mid-1990s," he said. His remark was a reference to the 1990s recession, when the federal government formed the Resolution Trust Corp. to dispose of thousands of assets held by failed savings and loans. Today, by contrast, distressed assets are selling at a much slower pace as lenders, thus far, have delayed taking the assets to the market.

Principal Phil Belling of Irvine-based LBA Realty also cited improving conditions over the past 18 months, saying that, "It's still a challenging environment, but there is less fear." Belling said that with no new supply coming onto the market because of the lack of new construction, industrial landlords should benefit as conditions improve and demand increases commensurately.

Despite their consensus that conditions have improved in the past year or so, the Naiop panelists mentioned concerns like the fear of a double-dip recession and the need for job creation to add momentum to the recovery. Although most said that they doubt that the economy is headed for a double dip, and while Grubb & Ellis economist Robert Bach said that most economists agree with that assessment, they said that the double dip still remains a possibility.

Bach said that one of his concerns is that the recovery will be jobless, pointing out that the term "jobless recovery" is of relatively recent vintage―from the last couple of recessions. What's troubling, Bach said, is that the period of joblessness seems to grow longer with each successive recession.

Bach also pointed out that tenants need to start signing larger and longer-term leases and rental rates need to recover before we can be sure that a recovery has a strong footing. "The hallmark of the recovery will be when lease terms get longer and average lease size increases," he said.

Another of Bach's concerns is the federal government's debt, although he said he is more concerned about the impact of legacy programs like Social Security and Medicare than the debt that the government incurred for the federal economic stimulus package. The legacy programs have a greater long-term impact, he said.

Despite some of his concerns about the overall economy, Bach said he is confident that Southern California and the Inland Empire will recover, as they have in the past. Others echoed the sentiment, including keynote speaker Staubach, who said that California "always seems to come back." Staubach pointed out that conditions have appeared pretty dire in past downturns both in Southern California and in the Dallas market where he is based, but both have always recovered.

Drawing on his career as a quarterback for the Dallas Cowboys, Staubach drew parallels between success in sports and in business, pointing out that having the right people does not in and of itself ensure success, especially in times of adversity. The key is having those people pulling together, he said, explaining how that kind of effort can overcome obstacles in both fields. "Adversity reveals genius," he said, "and prosperity conceals it."