December 11, 2008

CBA speakers take on the economy

We’ve had some good news recently on the local front. The Urban Land Institute’s recent survey of 700 real estate professionals named Seattle as the number one place to invest in commercial real estate in the coming year. The institute cited Seattle as a gateway to international investment with a vital downtown and a region relatively free of a glut of condos or office space.

The Puget Sound region has historically fared better than other markets during cyclical downturns. This one is different. No one has been exempt. Without debt, sales have stalled in all sectors, so armed with all the Northwest optimism and resiliency we can muster, the panel of speakers slated for the CBA Insights meeting answers the following questions:

How deep will this downturn go?

IVANOFF: I would expect a net employment contraction of roughly 0.5-plus percent for the region in 2009 with beginning regional economic recovery in the latter portion of 2009. Net employment in 2010 should be positive albeit at a relatively low pace (less than 1 percent). However, to the extent the current confidence crisis (disguised as a liquidity crisis) continues to cause irrational lender behavior to withhold working capital operating lines from small and intermediate businesses (as key demand drivers) for their revenue generation opportunities, then the regional impact will be far worse in 2009 and likely extend well into 2010 at a minimum.

MICHAELIS: The drop here will be less severe than the national average given companies here like Boeing and Microsoft that are driven by global markets. But it could be more severe than the early 1990s period in light of the overall economy.

SABEY: Deeper.

HYATT: By some accounts, it is already as deep as active professionals have experienced, even if the effects aren’t yet fully known or felt. If in August of 2007 (when BNP Paribas froze its CMBS fund signaling the start of this mess) anyone had predicted that in the subsequent months Fannie Mae and Freddie Mac would falter, that investment banking would cease to exist after the failures of Lehman, Merrill Lynch and Bear Stearns, that major banks such as IndyMac and Washington Mutual would succumb, that taxpayers would fund a $700 billion bailout to restore liquidity, that there would be a pending bailout of the Big 3 automakers, etc., that person would have been dismissed as a nihilistic Cassandra. Now people are almost anesthetized to the carnage.

How long will it last?

IVANOFF: Regional net negative economic contraction should last through the third and fourth quarters of 2008 and likely through the first three quarters of 2009 before positive economic growth for the region (starts) in the last quarter of 2009 and all of 2010.

MICHAELIS: This will likely be a two- to three-year problem, but it is extremely uncertain given the unique characteristics of this particular cycle. Easy money will not drive a housing and then economic recovery as in other deep recessions, such as 1982. Consumers are extremely vulnerable given the decline in housing prices, plus high debt levels.

SABEY: Three years or less.

HYATT: The worst should be past by late 2009, but with lingering echoes we might not believe it is over until mid-2010.

What is your business maintenance strategy for the next 12 months? Growth?

IVANOFF: Managing our existing income streams and credit default risk to our existing tenant base that is more heavily exposed in the current economic climate. Completing our current new building developments and securing additional building occupancies with credit-appropriate tenants on economic-appropriate lease terms given all alternatives, including passing on deals in the near-term for opportunities in strengthened market conditions. Growth? We will look at the investment landscape in the next 12 to 15 months based upon the opportunities where risk and reward align or where there is economic dislocation appropriately priced or mis-priced for the risk opportunity under evaluation.

SABEY: Position for growth.

HYATT: TCR’s local strategy for continued growth over the next 12 months is centered on execution, asset management, capital preservation and disciplined investment. As with all cycles, there will be phenomenal opportunities, and TCR is positioned to capitalize on the best of those.

Interviews conducted by Barbara Travers

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