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Economists Expect Real Estate Recovery in 2011

The nation is in for more than a year of stagnant job creation and tepid economic growth that will set the stage for marked improvement in 2011, according to two of academia’s respected authorities on the economy and commercial real estate.

In separate forecasts presented this month, economists in Georgia and Texas expressed dour expectations for national job growth in the coming year. Because commercial real estate depends on employment growth to drive the demand for space, the forecasts suggest that demand will be weak for the foreseeable future.

Dr. Rajeev Dhawan, director of the Business Economic Forecasting Center at Georgia State University, blames the credit crunch for pushing the economy into a recessionary state. In a forecast published Wednesday, Dhawan says the credit crunch has damaged the economy’s growth prospects until 2010.

“Some banks are on the brink of failure and it will be up to the FDIC to bail them out,” Dhawan says, expounding on the nation’s economic predicament. “Should they run short of funds, look for the government to bail out the FDIC, leaving taxpayers with the tab.” That’s why Dhawan is projecting real gross domestic product growth at a rate of 1.4% in 2008, decelerating to 0.5% in 2009 before beginning an anemic recovery to growth of 2.2% by 2010.

That lackluster economic growth means net job losses that have averaged 66,000 per month so far this year will grow to 90,000 losses per month in the second half of 2008. Expect less severe losses averaging 15,000 job cuts per month in 2009, Dhawan says. “The job market will emerge from the twilight zone in 2010, when the economy will add jobs at a monthly rate of 100,000.”

Recent and anticipated job losses are a serious challenge for the commercial real estate industry, according to Dr. Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University. “In the real estate business we don’t care what GDP is,” Dotzour quipped in a forecast presented to members and guests of the Real Estate Council of Austin on Aug. 18. “All we’re interested in is job growth, and we’ve had negative job growth in the U.S. now for about eight months. I call that a recession.”

Dotzour says the credit crunch has begun to thaw for global banks and has become a balance sheet crunch for commercial real estate lenders. Investors are amassing funds to invest in real estate, he says, and the challenge now is for lenders to clear devalued loans from their books so they can provide financing for new deals.

Both economists harbor heartening expectations for relief from high oil prices, which Dhawan expects will drop to $89 per barrel in the fourth quarter this year and average about $107 per barrel throughout 2009. Oil prices have already retreated 25% from the summer’s record highs near $150 per barrel now that American consumers have stepped back on consumption.

Less expensive oil would help the economy regain its footing before the Federal Reserve clamps down on inflation by raising interest rates. The Fed would prefer to keep interest rates low to stimulate the economy until banks have had more time to recover liquidity, economists say, but persistently high oil prices could thwart those efforts to let banks heal. “If the price of oil does not retreat below $100 per barrel by October on a sustained basis, worries of inflation will cause the Fed to raise rates much earlier than expected,” Dhawan says.

Consumers and manufacturers may find their dollars buy more this fall, which would help the economy limp through the winter. Dotzour believes the prices on steel, cement and other materials vital to commercial real estate construction will come down this fall along with oil prices.

Why? Dotzour theorizes that China’s extraordinary efforts to prepare for the Olympic Games spurred that country to accelerate construction programs for transportation infrastructure and residential and commercial space, and to stockpile commodities such as diesel fuel. Now that the Olympics have ended, Dotzour expects China’s demand for those products and materials to slacken for several months, giving global producers an opportunity to catch up with demand and bring prices down.

“It’s going to be interesting to see what happens to the price of copper and steel and all the construction materials,” Dotzour says. “If [China’s] demand does slow down, we’re looking at the possibility of a pretty dramatic decline in construction materials costs in the coming months.”

Dotzour points out a source of hope for commercial real estate investors, who would certainly welcome an unexpectedly stronger economy next year. Due to the credit crunch and economic uncertainty associated with the presidential election, Dotzour believes a number of U.S. companies and consumers have put off major decisions to spend or commit to space this year.

By March 2009, he says, businesses will have a better understanding of their financial standing and tax burdens under the new president, and may cut loose with a swath of business deals, leases and real estate purchases. “It’s possible we could have a very pleasant surprise around April.”

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