Looking for Signs of Spring In Our Winter of Discontent

March came in like a lion, meteorologically speaking, with heavy snow and cold in the East. Too bad the same couldn't be said of the feeble U.S. economy, which is barely purring and continues to shed jobs. Non-farm payrolls plunged by 598,000 in January, the third consecutive month that job losses totaled nearly 600,000.

Adding insult to injury, revised GDP figures show that the economy contracted at a 6.2% annual rate in the fourth quarter, not 3.8% as first estimated. It was the largest quarterly drop since 1982. The question is, when will recovery occur and what will it look like? “It will be ugly, slow, messy and often inconclusive,” says Robert Bach, chief economist for Grubb & Ellis.

It wouldn't be the first time. The recession of 1990-91 officially began in July 1990 and ended eight months later, yet the incumbent running for U.S. president lost the election. “People still thought the economy was in bad shape in November 1992, which is why Bill Clinton was able to beat George Herbert Walker Bush,” says Bach. “I think we're going to see the same thing. This recovery is not going to feel good.”

The commercial real estate market can't become healthy again until GDP starts to grow and the employment situation stabilizes, or, as Bach likes to say, until the elevator stops falling. The most optimistic projections call for GDP to turn positive in the fourth quarter with a gradual recovery in 2010.

Although it's not yet reflected in the deal volume, the commercial real estate industry has cleared one hurdle on the road to recovery. Everyone with a stake in the business recognizes that we're in a deep recession and that property values generally need to fall further to wring out the excesses of the last boom.

A year ago, some industry experts were expressing doubt that this downturn would meet the technical definition of a recession: two consecutive quarters of negative GDP. That uncertainty is gone, and the dam between buyers and sellers — the bid-ask gap — will break at some point. “It will either be an owner who is forced to sell, or banks that are going to have to sell. They realize they're going to have to take a [pricing] haircut. They're finally willing to do that,” says Bach. He predicts that U.S. property sales will increase 15% this year.

Cracks in the armor

Mounting financial stress on property owners is evident in data compiled by Horsham, Penn.-based Realpoint LLC, which tracks delinquency trends in commercial mortgage-backed securities. The researcher projects the delinquent, unpaid CMBS balance to reach between $12 billion and $15 billion by the end of the first quarter compared with $3.75 billion a year earlier (on a trailing 12-month basis). The 1.28% delinquency rate is expected to rise to nearly 3% by the end of 2009.

The total balance of CMBS loans in foreclosure or classified as real estate owned — properties taken back by lenders — climbed for the 15th straight month to $2.39 billion in January, up from $2.28 billion in December 2008. Realpoint is maintaining its negative outlook on the retail and hotel sectors and monitoring several multifamily loans in the New York area that are at risk of default.

Right program?

The $787 billion stimulus package signed into law by President Obama in February has sparked strong opposition and support. Two years from now, will we be singing its praises, or panning the stimulus package as a missed opportunity?

“The scenario we are facing [credit crunch, job losses, economic contraction] calls for some pretty aggressive action on the part of government,” Bach believes. “I think it will work because it's a mix of tax cuts, infrastructure spending, other types of spending and aid to state and local governments. So, you're attacking this across the board.”

But won't the stimulus compound the problem of huge deficits? “It will add debt to very high levels, no doubt about it, and it may trigger inflation somewhere down the road,” says Bach. “But that's probably a lesser problem than deflation in the near term. I think the government is willing to take that risk.”

So, as winter fades to spring and the days grow longer, let's hope that our confidence gets a much-needed boost from an economy that's growing stronger.

Contact Editor Matt Valley at [email protected].

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