Magazine article Real Estate Issues

Something Has to Give-Or Does It?

Magazine article Real Estate Issues

Something Has to Give-Or Does It?

Article excerpt


AS THE NEW YEAR GETS UNDERWAY, MANY OF US ARE TAKING stock of the economic outlook for the year ahead. We've watched as the U.S. economy has demonstrated its resilience over and over again during the last 5 years. It has survived the bursting of the bubble, major terrorist attacks on U.S. soil, wars in Afghanistan and Iraq and the ongoing war on terrorism, and corporate and accounting scandals, along with numerous smaller shocks. We knew, however, with Hurricanes Katrina and Rita late last summer and higher gasoline prices that the strength of the consumer would be challenged. Our concerns have been whether the business sector would prove to be strong enough to pick up the slack as consumer spending faced strong head-on challenges and whether inflation could be held in check in a rising interest rate environment.

These shifting currents create quite a balancing act for the economy and reflect just a few of the challenges impacting real estate and other investments. In looking at the strengths and weaknesses in our dynamic economy, real estate has offered outstanding returns as compared to the stock and bond markets. However, the new challenges we are facing give rise to a host of new concerns related to real estate performance. Will consumer spending slow, and how will the retail property sector be affected? How will a reportedly slowing housing market affect apartment returns? Will business hiring continue and will rents for office and industrial space increase? With capitalization rates so low, what will drive returns? And more importantly, will real estate returns in 2006 be significant enough to take on the risk associated with this asset class? Given these imbalances, it seems that something has to give-but does it?


Despite the uncertainty, the broader economy continues to strengthen. The impact of Hurricane Katrina, the costliest natural disaster in U.S. history, has been about what many forecasters expected. There was a short-term negative impact to the national economy, but as clean-up and rebuilding got underway, the economy began to respond positively. In fact, third quarter real gross domestic product (GDP) grew at an upwardly revised annual rate of 4.3% in third quarter 2005. Surprising most experts, this half-percentage point increase over the seasonally adjusted annual rate released a month ago is the best showing since the first quarter of 2004.

This growth was supported by strong spending during third quarter 2005 by consumers and by businesses. Consumer spending rose 4.2%, with purchases of durable goods increasing by 10.5% and nondurable goods spending increasing by 3.6%. Business spending increased 8.8%, with spending on equipment and software rising 10.8%.

As one of the strongest indicators of the health of the economy, the U.S. deficit fell to $319 billion for fiscal year 2005, down $94 billion from the previous year's record, reports the Treasury Department. This is due to a surge in tax revenues, with receipts for the year totaling $2.154 trillion, up from $1.880 trillion a year ago.

However, the housing market has been showing signs of slowing down during the last few months. A recent report from the National Association of Realtors indicated that their index of pending home sales for October 2005 declined 3.2% from September and was down 3.3% from a year earlier. A slowdown in consumer spending is expected, although it appears holiday sales have been strong thus far this season.

And although new productivity numbers are strong (4.7% during third quarter 2005, the largest gain in productivity since mid-2003), corporate profits after taxes fell by 3.7% during third quarter. Even so, year-over-year profits increased 9.4% as compared to third quarter 2004. Employment remains strong, although predicted job losses by Ford and General Motors will have a huge impact in those regions where the affected plants exist. …

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