Rosen on Real Estate: Let the Good Times Roll
The Bay Area economy is the strongest in the nation with the exception of oil-booming North Dakota, and commercial real estate is well positioned to take advantage, buoyed by low levels of new construction, rising optimism among lenders and the all-important job creation. Moreover, there is still a long way to go in this recovery.
So said Kenneth Rosen, chair of the Fisher Center for Real Estate & Urban Economics at the University of California, Berkeley.
“It is not quite as strong as the 1990s, but we are in the third year of recovery, in the third inning of a nine-inning cycle, and we have a long way to go,” Rosen told the 17th Annual Fisher Center Real Estate Conference on April 30 at the Parc 55 Wyndham Hotel in San Francisco.
He is as bullish has he has been in a long time, Rosen said, though he cautions that risks remain. And, while he is sanguine about the outlook for the rest of the year, he is less so about 2013.
Rising interest rates, which he believes are coming, hold a particular threat for commercial property owners because they will cause capitalization rates to rise, too. The Federal Reserve’s so-called “operation twist” program ends next month. The goal was to hold down interest rates on long-term Treasuries and other securities by selling short-term Treasuries and using the proceeds to buy long-term government debt. June 30 is the deadline for the Federal Reserve to sell the last of the $400 billion in short-term Treasury securities that it allocated for the program.
Interest rates could rise “in the blink of an eye,” Rosen said, though it is impossible to know whether it will happen right away or a year from now. “Lock in [interest] rates on an assumable loan now,” Rosen advised. In the future, “a borrower will pay you for it.”
Holding back greater economic recovery are uncertainty about the outcome of the presidential election, future national tax rates on capital gains and earned income, and the role that Fannie and Freddie will play in the housing market.
Artificially low interest rates also are holding back greater job creation by giving companies a financial incentive to invest in capital goods rather than hiring workers. Government job cuts including cuts in defense spending and the still-struggling construction sector also are retarding greater expansion, especially in Southern California. Erosion in the strength of the state’s entertainment industry also is hurting the southern part of the state.
Europe’s financial and political chaos isn’t helping, particularly U.S. exporters, he said, but the effects are not great, shaving 0.5 percent from U.S. economic growth. He believes oil prices will fall back to $60 a barrel amidst a “dramatically increasing supply” and a “worldwide boom in exploration,” epitomized by events in North Dakota. The dollar is in “long-term decline” and will stay weak so long as the country maintains its huge trade imbalances.
Federal Reserve Chairman Ben Bernanke’s low interest rate policy has some tremendously pernicious effects, he said. It encourages Washington to continue to borrow at the expense of savers, which has particularly hurt less-well-off retirees on fixed incomes. It also makes it hard for banks and insurance companies to make money. “He is throwing money at borrowers and punishing savers. A zero interest rate works for no one. They tried it in Japan, and it didn’t work,” he said.
He also sees rising political risk at the national level as Washington becomes increasingly dysfunctional and the presidential election draws nigh. If the turmoil becomes too pronounced, it could affect the outcome of the election, he said.
He projects 2.5 percent growth in the national economy this year and the addition of 2.5 million jobs, which should push the unemployment rate to 7.5 percent by year-send. Northern California’s growth rate could be as great as 4.9 percent, but Southern California will likely lag the national pace. San Jose has recovered more than three-quarters of the jobs that it lost; San Francisco has added back not quite 60 percent. Oakland has only begun to stabilize.
San Francisco will add 28,000 jobs this year and Silicon Valley 30,000.
Tagged Annual Fisher Center Real Estate Conference, Bay Area, California, commercial real estate, economy, Federal Reserve, Fisher Center for Real Estate & Urban Economics at the University of California, Ken Rosen, Northern California, real estate, Silicon Valley