While Republicans and Democrats point fingers across their respective aisles, the market this past week has decidedly made up its mind in the wake of the S&P downgrade. Although many analysts predict a rebound in the stock market, there remains volatility and uncertainty surrounding the U.S.’s ability to compromise and tackle the increasing debt situation. S&P’s decision to downgrade the nation’s credit rating was based upon several factors, but one telling factor was the political discourse surrounding the debt ceiling deal these past few months: “We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.”
Political discourse aside, the big question for our industry is, how will this affect Commercial Real Estate? As is typically true, the answer may not be that easy to determine. For one, if bank stocks continue to lose value and lending capital, there may be less money to lend to investors and entrepreneurs. While it seems as though banks are finally getting through the worst of their spreadsheets in regards to bad debt, the uneasiness in the market could reflect on rates and lending. On the flip side, investors may need to re-evaluate their risk positions in their portfolios which could prompt a demand for low-risk, high-quality real estate. Inflationary concerns could further promote the thinking of moving into tangible assets all of which may help bolster the Commercial Real Estate values.
However, on the demand side, businesses that weren’t sure whether or not to invest in workers may continue to have a “wait and see” attitude. Unemployment figures, although slightly up in July, continue to remain anemic and could see further stagnation in the interim until the summer of uncertainty is over.
Although rates continue to remain historically low, the players with cash are definitely in the advantage. Many REIT’s have taken a hit this past week, yet remain resilient due to their liquidity positions and the fact that there are still many bargains to be had in the market. We have noted in the immediate area, that there are aggressive groups taking advantage of the lull in the market to complete exchanges or proactively re-position their portfolios. Of course, many of these buyers are looking at large, high quality properties (especially in the Bay Area), such as Class A office, Biotech, and Multi-Family, which doesn’t do much for the mid-tier investor looking to move 50,000 square feet of industrial.
In the next part of the series, we will look at the Industrial and Office Real Estate and their current resilience to the market turbulence.