By Erika Morphy
August 3, 2011
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| Capitol Hill |
WASHINGTON, DC-So it happened. Within hours of an apparent default, Congress came together and delivered a bill that would raise the debt ceiling and work towards reducing spending.
The impact to commercial real estate is still a work in progress: more cuts to government spending will be identified under the deal, as will additional sources of revenue. So yes, carried interest is most likely back, yet again, on the table. Still, with the deal closed, the industry has been able to come to a few conclusions about the next two years will bring. Some thoughts as expressed to GlobeSt.com.
We always knew there would be a debt deal...
"I don’t think a default was ever viewed as credible," Kevin Finkel, executive vice president, director of acquisitions at Resource Real Estate, a New York-based real estate asset manager, tells GlobeSt.com. "That is why the markets never fluctuated that dramatically even when talks seemed to break down."
…But we didn’t know how brutal it would be.
That said, the way the political drama played out with the extreme brinkmanship, took a lot of people by surprise. "Especially with the new crop of Congress people from the Tea Party that didn’t want to compromise,” Finkel says. “To me as a businessperson, that was scary and I think it scares investors too."
Does this mean that every issue that comes up in Congress will result in a bloodletting sprawl, Finkel wonders. "I am afraid so and that is no way to run a country," he remarks.
The US will still be a safe haven for investors…
There are 17 countries in the world that sport the AAA rating, Eric Michael Anton, executive managing director and principal of Eastern Consolidated in New York, points out, a list that includes such tiny locales as Isle of Man. “Foreign capital is still coming here,” he tells GlobeSt.com. Even in the run up to the midnight hour agreement, so to speak, the bond returns showed that investors continued to seek out US debt, he says.
…But the bifurcation of trophy and second-tier markets will step up.
Lately there have been signs that investors are interested in Middle America again--particularly multifamily investors that are finding prices too rich on either coast. Foreign investors, albeit more slowly, have been following suit. However, if the US does suffer a credit downgrade the distinction between the gateway global cities and the rest of the country will surely sharpen, Anton also says. “Top cities such as New York, Washington, San Francisco, Boston and Los Angeles will continue to pull in tremendous debt and equity.” Foreign capital, however, stayed away from the Rust Belt, and other secondary cities, and if the US does get downgraded, this will be an additional reason for them to stay away, he said.
We got a commitment to slow spending…
This had to be done, Finkel says. "The country had to deleverage and perhaps just as importantly, it had to tell the world that our debt would not grow anymore."
…But at what cost?
The price of this deal was substantial cuts in government spending, Dennis Russo, co-chair of the commercial real estate department at Manhattan-based law firm Herrick, Feinstein LLP, tells GlobeSt.com. That will lead to slower growth, given the sluggishness of the private sector.
“Economic sluggishness plus austerity tends to equal a less-than-fertile environment for vitality and growth in commercial real estate," says Russo. “The health of most sectors of the commercial real estate economy--office leasing, for example, and sales-investment--depends on growth and the vitality of the gross domestic product, and for the time being, I just don’t see where that growth will be coming from.”
The impact of Washington’s austerity is already being felt outside of the debt ceiling negotiations. The Centers for Medicare and Medicaid Services just announced an 11.1% cut in Medicare rates set, according to the Wall Street Journal - an announcement that promptly sent health care REIT prices tumbling.
Property valuations could be affected in the near term as well, Michael A. Torres, CEO of Adelante Capital Management LLC, a REIT investment manager in Oakland, CA, tells GlobeSt.com. The rest of the cuts and their subsequent effects will remain in doubt until the “Super” Congress decides on cuts, or they don’t.
Source: GlobeSt.com
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