Magazine article Journal of Property Management

Caution: Double-Dip Recession Ahead?

Magazine article Journal of Property Management

Caution: Double-Dip Recession Ahead?

Article excerpt

Certain economic conditions suggest the current recovery may be short-lived, and that a more serious "double-dip" recession could lie ahead.

Property and asset managers must be able to interpret the economic climate in real time in order to identify the turning point in the economy. Even more importantly, they need to be able to identify the magnitude of either the growth or decline of the economy at any particular time, in order to make articulate budgeting, financing and leasing recommendations to their owners. The sophistication of investors and lenders today requires that their property and asset managers plan strategically (long-term) by providing five- and ten-year forecasts in addition to a traditional annual operating budget.

Weather Report

A number of statistics indicate clear skies are ahead. Business inventories are back in line, manufacturing is expanding, orders for durable goods are growing, interest rates and inflation are low, oil stocks and prices are reasonable, productivity is high, liquidity is good, banks' balance sheets are better than ever, the growth of the money supply is brisk, unemployment looks to have bottomed, the yield curve slope is positive, and consumer confidence is good.

Further indications that the recovery is at hand can be found in a recent survey of 35 top forecasters and economists by the Federal Reserve Bank of Philadelphia. In that survey, the majority of respondents see a turnaround in process with reasonably good growth forecasts moving forward. Also, in February, Anaarvan Banerji, research director for Economic Cycle Research Institute (ERCI) said he believes that this recovery is sustainable, and a double-dip is not likely.

Anthony Chan, chief economist for Banc One Investment Advisors, told attendees at IREM's 19th Annual Asset Management Symposium in San Diego in March that economic indicators are positive. "The Federal Reserve is not in a rush to raise interest rates, productivity is increasing and the markets are inching up," he said. "Slow-term expansion is what long-term recovery is all about." Chan predicted that things will pick up in the second half of the year, but does nor expect significant improvement until 2003.

Debt Leads to Double-Dip

Despite these positive indicators, some signs suggest the "perfect storm" may be brewing. Consumer and business debts are at historic highs. Those seemingly beneficial low interest rates have also served to tap out consumers' purchasing power, and the consumer accounts for two-thirds of all economic activity. Interest rates are increasing, and after adjusting for inflation, they are not as low as they would seem.

Also, fiscal and monetary policy has adopted a less accommodative stance, the housing market may be forming a bubble, and the stock market (an uncanny leading indicator) has been tentative. Typically, many of these items work their way into equilibrium during recessions. But at this point in the recovery process, some have yet to show signs of correction.

Stephen Roach, Morgan Stanley's chief economist, sees a double-dip possibility due to consumer debt: "Payback is inevitable," he said. "This speaks of an imminent relapse in consumer demand, precisely the stuff of the classic double-dip."

Predicting more doom and gloom for the economy, Michael Dow of CRESA Partners in Minneapolis told members of The Counselors of Real Estate during their convention in Washington, DC earlier this year: "There is a danger of a double-dip in the recession. There is a serious lack of demand for space in most cities, and there is an enormous amount of sublease space hanging over the market."

The Return of Investors

Many industry experts believe 2002 will be a crucial year for real estate. It will be a year that will determine whether or not real estate is legitimate and if it is a real asset class. If investments have been made sensibly, Dow believes real estate will get through the downturn without becoming a whipping boy again. …

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