Call it the Return of Goldilocks. A few weeks ago in this space, we featured economist Nariman Behravesh on the global economy and the prolonged Goldilocks times we’re all enjoying. Shortly thereafter, Deloitte Consulting held a teleconference of some 300 clients, all real estate players of one stripe or another, in which they asked their constituency to vote on the current climate and the months to come. In the wake of that teleconference, national director of real estate capital markets Dennis Yeskey sat down with to discuss the vote in depth and turn Goldilocks from a generalist into a specialist. While he has a rule about making predictions, he did let us know how Deloitte’s clients are reading the tea leaves. So where do you fall in the Great Goldilocks Debate?

Yeskey: We don’t predict, but the market seems to be swinging two-thirds toward Goldilocks. When we did our survey, the majority of the people voted not for Goldilocks but something below that. It won’t be a recession, and there’s a certain optimism, despite all the confusion in the market. Given the status of real estate and the length of the upward curve, it’s fascinating to see how differently the tea leaves are being read.

Yeskey: I’ve never seen a time with so many contrarian views, and almost all of these disparate opinions are based on historic rules. For example, people keep bringing up that we’re pushing almost a year of an inverted yield curve and every time it’s happened there’s been a recession. So you have to understand the perspective of those stating the opinion, what they do for a living and where they come from. Wall Street, for example, is very optimistic right now. Real estate guys tend to be more conservative. An analyst might say there are some major bad things going on that can’t be explained away. And in terms of bad things?

Yeskey: The one bad message that no one seems to be picking up on is a lack of new business investment. Consumer spending is taking a bigger chunk of GDP growth, and business consumption has been flat to down. In a healthy economy you want to see a bit more business investment, and in the past year it hasn’t been there. Some people predict that business investment will pick up and that will bring the economy back. In a recent UpClose, Nariman Behravesh of Global Insight said one of the drivers of the Goldilocks economy was capital spending.

Yeskey: I’m talking about business consumption as a part of the GDP. It was okay in the fourth quarter but it trended down. Goldilocks says it will pick it up, but again, everyone is looking at historic rules and saying it’s got to perform this way or that. So what does all of this mean for commercial real estate?

Yeskey: We don’t know who’s right on this Goldilocks question, but either way, the industry is in a good position. If Goldilocks happens, the fundamentals will continue as they have for the past year and a half. Vacancies will keep going down and rents will be the big value-generator over the next couple of years. You can only get so much cap-rate compression. You’ve got to worry more about your bricks and sticks than financial engineering. And if the economy tanks?

Yeskey: Rent growth won’t be as strong, but neither will we blow up as we did in the ’80s or mid ’70s. Are we no longer cyclical?

Yeskey: We still are; it’s just that the peaks and valleys are more like rolling hills. But there are a lot of scenarios that could create craters in those hills, things such as inflation picking up and the fed raising rates, so we aren’t immune. But we’ve done some good things to create those rolling hills. REITs legitimized us. There’s a lot more information and transparency. While global data is still pretty bad and I don’t believe everything I read, globalization has also helped legitimize us. The focus historically in the US has been on the stock market and bond market. We’re finally catching up to the rest of the world and real estate at last has a place at the adult table in this country. I know you don’t like to predict, but it sure sounds like you fall in more with the Goldilocks crowd.

Yeskey: We’ve performed amazingly well for 12 years. We should have overbuilt the market over the past three years with its cheap debt, dropping vacancies and rising rents. We have a backlog of cash, and rents are moving in the right direction. But you need a recession to cool that.

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