Quo Vadis Redux-Or Where Are We Heading?
Rose, Daniel, Real Estate Issues
Below is the text of a speech presented by CRE Daniel Rose at the first national conference of the Yale Alumni Real Estate Association, held at Yale University in April 2008. Rose asks real estate professionals to think about... "where we have been, where we are, and where we should be going."
AT THIS FIRST NATIONAL CONFERENCE OF THE Yale Alumni Real Estate Association, it seems appropriate to address two important questions: First, looking at the real estate field in perspective, we should ask where we have been, where we are and where we are going. Second, as individuals seeing ourselves in perspective, we should ask where we have been, where we are, and where we should be going.
To deal effectively with the first question, we must realize that real estate economics has micro and macro aspects. Local challenges of site acquisition, building design and construction, leasing, management and so forth are obviously crucial, and they are the fundamentals of our day-to-day activities. But the macro problems of real estate cycles and the financial conditions that determine a project's success are influenced by national and global factors not readily apparent.
Local market conditions and global capital flows must both be understood; and, in 2008, the macro economic question is more challenging.
No one has an unclouded crystal ball, and it is sobering to realize that, for example, the U.S. credit crunch of 2007 took virtually all economists by surprise. In 2006, the term "subprime mortgage" was unknown to the general public, and most economists (except for a few such as Yale's Professor Robert J. Shiller) seemed unconcerned with housing finance practices.
Today, the current volatility of the stock market, with its three-digit surges and crashes, shows how nervous investors are; the fluctuating interbank lending rate shows how wary banks are of lending even to one another; and the conflicting signals we receive are bewildering.
On the same day that the Blackstone Group announced it had raised a fresh $10.9 billion fund to invest in real estate opportunities ahead, JPMorgan Chase analysts predicted the U.S. commercial real estate market could decline by as much as 20 percent over the next five years. And at the moment when most observers anticipate a softening of the Manhattan office market because of an expected loss of 20,000 to 30,000 financial services jobs, the General Motors Building is rumored to be close to a sale at $2.9 billion that would give its purchaser a negative cash flow.
On Friday, March 14,1 heard President Bush tell the Economic Club of New York how strong and resilient the American economy was and how government should not over-react to current problems. As he spoke, Bear Stearns informed the government it was contemplating Chapter 11 protection, and Messrs. Bernanke and Paulson spent the weekend pulling rabbits out of their financial hats.
The President's relaxed reaction, then and since, recalls the comic version of Kipling's poem If--"If you can keep your head when all about you are losing theirs and blaming it on you, perhaps they know something you don't."
This week, Federal Reserve Chairman Bernanke told Congress that he expects the economy to grow in the second half of 2008 and to be solid in 2009. Yet this same week's Michigan Consumer Confidence Survey showed public confidence (historically the best predictor of recession) had declined to its lowest level in 16 years; the Conference Board's index of leading indicators fell for the fifth consecutive month; and forecasts indicate that residential construction this year will fall below one million starts for the first time since 1991. Traditional economic forecasting signals--such as job loss/creation, home foreclosures, credit card delinquencies, bankruptcies--are negative.
Optimists, who want to believe in good times, but who contemplate grim fundamentals, feel like the fellow in the Tom Lehrer song who was "as nervous as a devout Christian Scientist with appendicitis. …