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“Nabbefeld”
Joe Nabbefeld
Real Estate Editor

January 31, 2002

Economic forecasts: who needs 'em?

December and January always bring on another economic forecasting season, full of nearly incomprehensible data deluges. Efforts to understand the data are keener than normal this time around because we find ourselves in the middle of a recession, a war and a major Boeing swoon. Business people with strategic decisions at stake have been listening more intently than usual while economists read the proverbial tea leaves.

Enter Jim Falconer, who listened hard last week as economist Doug Pederson provided the latest prognostication to an apartment industry gathering — hard enough that Falconer stood up to directly challenge whether economists will lay it on the line by making firm-enough predictions that businesses can bet on.

“Forecasters often rely on ‘consensus’ opinions of economists such as the Blue Chip panel, in effect an average of a number of projections by ‘expert’ economists,” Falconer said at Cushman & Wakefield’s heavily attended Multifamily Investor and Developer Symposium. “Many of these same economists assume that the current recession will mimic prior recessions. Thus, it is not surprising that there is a consensus among these professional economists of a recession of average severity and duration.

“Although this approach may be comfortable for the forecaster, this average of the averages results in a forecast which is not very helpful to anyone working in the real world.”

In fact, such a projection by its very nature has to be wrong, Falconer then ventured.

“One thing that is certain is that the recession will vary from the average,” said the Seattle lawyer-turned-investor who has holdings in commercial real estate, a fishing fleet and other businesses.

“The more important questions are: What are the chances that this recession will depart from the average, and what could those departures look like?” Falconer said. “A more-helpful forecast would address the likelihood and ramifications of a recession which is more, or less, severe than the average, and, probably more significantly, of longer, or shorter, duration.

“For those of use who have to function in this economic environment, it is not productive to be presented with the typical economic forecast,” Falconer elaborated after the event. “We must consider the various possible economic scenarios so that we can survive the more-severe, and longer, recession and take advantage of opportunities in the more-moderate, and shorter, recession.”

Falconer said economists face strong motivation to take the low-risk path of sticking with the accepted average predictions: “If they’re wrong, they get noticed. If they’re in the middle, they don’t.”

Pederson took the bait at the symposium. He said he’ll bet that if this recession, for the Northwest, turns out different than the average forecast, it will be less severe and shorter, not more.

“I fall to the optimistic side,” he said.

First, he said chances remain greatest that the recession will be just as deep and long as the consensus forecast predicts. That would mean the first signs of a rebound for the Northwest would appear in this year’s second half, with the rebound itself taking place in 2003, lagging the national recovery by half a year.

He said the chances are 55 to 60 percent that the consensus will be right. That left him 40 to 45 percent left to allocate, and he said chances are 20 to 25 percent that “growth rates will be better than that and the recession will be less severe” compared to 15 to 25 percent that the economy will be weaker.

Pederson also defended the consensus forecasting approach.

“I guess averages don’t attract as much attention as the extremes, but more often it’s the average, or consensus, that is correct,” he said.

Pederson and partner Dick Conway have been issuing a Northwest economic forecasting newsletter for nine years and working as economists for more than 20 years each. They issue a yearly report of how close their forecasts came. Their status as the most-cited local economists attests to their better-than-average shooting percentage.

The two began predicting this recession, which officially kicked in last spring, in the fall of 2000.

Falconer’s roles include chairman of the Vance Corp., which owns older office buildings on the north end of downtown Seattle and is proposing to build a new luxury hotel-and-condos tower near the Westin Hotel in partnership with Microsoft billionaire Paul Allen.

Falconer offered a glimpse into his crystal ball.

“My concern is that, although the recession may not be one of the more severe ones for the Seattle area (compared to the legendary early 1970s Boeing bust, for example), the duration could be considerably longer than many of us are prepared for,” he said. “Furthermore, as the improving national economy results in higher interest rates, the local real estate industry could end up with the worst of both worlds: higher interest rates in a sluggish local economy.”

Big Macs hot in Auburn

McDonald’s bought 1.2 acres from Quadrant Corp. next to the Supermall of the Great Northwest in Auburn on which to build the second McDonald’s hamburger stop at the mall and the fourth in Auburn.

Guess what folks down Auburn way appear to like eating?

The new 4,000-square-foot McDonald’s will open in July, said McDonald’s site acquisition manager Bruce Szczepanski.

McDonald’s already operates a smaller restaurant inside a Wal-Mart next to the Supermall, along with two elsewhere in Auburn. Broker Sherwood Korssjoen of The Sherwood Group represented Quadrant. Matt Wood of Kidder Mathews & Segner represented McDonald’s.

Quadrant at one time owned the Supermall site as part of 314 acres it controlled at the crossing of highways 18 and 167. The Supermall’s developers consumed a chunk of that and planned to expand onto more, but then the mall didn’t do as well as hoped and Quadrant took back a large undeveloped tract adjacent to the mall a few years ago.

Quadrant said it has 29 of those acres up for sale.



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