The economy is facing plenty of headwinds as it struggles to recover – disappointing employment growth, a surprise dip in retail sales last month, a housing market that just can’t lift itself off the floor, unprecedented state and local budget cuts, cascading federal deficits that make another round of stimulus spending a very tough sell politically, and an end to the Bush tax cuts next year. And then there’s Europe, which could trigger another round of financial contagion. It’s all about debt these days – too much short-term debt that must be rolled over to cover long-term obligations – whether in the housing market, commercial real estate or spendthrift countries in the euro zone. The fear is that banks in Europe and elsewhere will incur losses if Greece and other overleveraged countries are unable to refinance their sovereign debt, forcing them to restructure or default. The contagion happens when banks, fearful of losses in their own portfolios and at other banks, become suspicious of lending to one another and to borrowers in general, hoarding their reserves and depriving the economy of the debt capital needed to keep the recovery on track. The solution from the European governments and European Central Bank is (drum roll, please) more debt, just as it was when the U.S. government pushed through the $862 billion stimulus package, the $700 billion TARP and a host of lending programs implemented by the Federal Reserve that increased its balance sheet by more than $1 trillion.
Ironically, at a time of increased fears that banks will take less risk, commercial real estate investors are taking on more risk, deploying capital into opportunity and value-add properties because the supply of core assets in primary markets, what investors prize most, is limited. This is unfolding even as the leasing markets continue to slide, except multifamily, which has stabilized.
Last week I sent out a three-question survey to Grubb & Ellis investment brokers on how the headwinds blowing from Europe were affecting their business. Sixty-one percent said their clients and lenders have not become more conservative (no postponed deals or property searches), and 75 percent said the turmoil has had no effect on their business. However, the market has not escaped unscathed. One deal fell through when the Canadian buyer got cold feet, and a German investor put activity on hold for 90 days. There is some feeling that lenders have turned more conservative recently. But it’s not just the euro zone that is causing some players to pause. As one broker said, “People are just not sure which direction things are headed. Euro zone, Gulf spill, financial regulations – there is a lot to digest.” Another broker responded that it’s tough to tell because there is so little sales activity to begin with – which is a very interesting point. The focus recently has been on the return of capital to a couple of market segments – core assets in primary markets and highly discounted distressed assets. But transaction volume, though up substantially from last year, remains very, very low historically. There’s still so much blockage in the market that it’s tough to discern whether Europe’s problems have made it worse.
The third question in the survey addressed the likelihood of a double-dip recession, and here the response was 50/50. Most mainstream economists see growth continuing this year and next – more slowly in the second half of 2010 and then firming in 2011, but the survey respondents are more skeptical that the recovery can be sustained.
Click here to view the results of the survey. Be sure to click on the link below each graph that says “show replies” in order to see additional comments and color provided by the respondents.