Experts assess chance of recession

Real Estate and Development
By Brian Wargo / Staff Writer

In a city dependent on tourism and a housing industry clinging to hope for a quick recovery, Las Vegas Realtors, developers and investors remain anxious about whether the U.S. is headed for a recession.

Those fears only grow when Federal Reserve Chairman Ben Bernanke recently warned of threats to the economy — that economic growth will likely slow noticeably in the coming months because of oil prices adding to inflation. Despite his warning, he quickly added that the economy would rebound by the middle of 2008.

Throughout an Urban Land Institute conference in Las Vegas that brought some of the leading investors and developers in the country, the consensus was that although the U.S. economy is slowing and growth rates of investments have to be adjusted because of it, there won't be a recession.

The biggest concern is the fallout from the subprime lending woes and its effect on the credit markets and the housing industry with a rising number of foreclosures. To put it into context, Hessam Nadji, managing director of research services at Marcus & Millichap, says the financial impact of an expected 2 million foreclosures is expected to be about 3 percent of gross domestic product. That's well below the 8.5 percent of GDP during the S&L Crisis and recession of the early 1990s, he said.

"This is not unlike other bumps in the road that we have had except that it is much bigger psychologically," Nadji says. "There is clearly an overreaction."

That doesn't mean there aren't concerns, however, he says.

Job growth has slowed and there are questions of where the jobs will come from because 40 percent of those created over the last five years were related to the real estate market.

Nadji also says retail sales have slowed in part because consumers have lost discretionary income from their housing equity.

Although some cite a study that shows that if borrowing against a house stopped completely, it wouldn't greatly impact retail sales, others continue to remain concerned about consumer spending.

Ron Sturzenegger, the global head of real estate and lodging with Banc of America Securities, says recessions happen a lot of different ways. Some recessions are financial or a corporate crisis while others are a consumer crisis.

When it comes to financial institutions, many are writing off bad loans for billions of dollars and saying they're fine. They are so well capitalized compared to how they were in the 1980s and 1990s, that they can afford to take substantial write downs and say they are strong financially, Sturzenegger says.

Corporations are doing well with their earnings, he says. That brings us to the consumer.

"The biggest question is what happens to the consumer when their houses don't have the ATM effect," Sturzenegger says. "What if they actually have to put money into the house to support the loan or their adjustable rate mortgages are ratcheting up and their payments go from $400 a month to $850 or $900. And then they struggle to make their payment. The issue right now is not a financial or corporate problem but what will the consumer ultimately do. If we do lead ourselves to a recession, it starts at that end of the market."

Daniel Hurwitz, the president and chief operating officer of Ohio-based Developers Diversified, which owns and manages more than 740 retail properties in the U.S. and abroad, says anyone who predicts a recession isn't looking at the facts because there is growth in wages, jobs and retail sales. He much of the equity people took out of their homes didn't go to retail sales and the fallout shouldn't hit that sector hard.

"We don't think there will be a recession," Hurwitz says. "We think it is all overblown."

Hurwitz says he's heard from retailers in the same exact center in the same product line who talk about their sales growth. One complains that the oil prices or economic slowdown has lowered their sales and the other will say they're doing great.

"We have had a lot of excuses coming through the pipeline," Hurwitz says. "It's about merchandising. The losers are going to look for an excuse."

Chris Cole, chief executive of Cole Cos., a Phoenix firm that partners with investors on commercial developments, says the U.S. technological advantage over other countries will erode over the next decade or two but for now the U.S. is in a good position. It is an affluent society with people earning and inheriting record amounts. That wealth of Baby Boomers will work its way through the economy for another 20 years, he said.

Looking ahead at commercial real estate: Brian McAuliffe, managing director, chief investment officer with RREEF Alternative Investments, says he's most bullish on the apartment sector given what's happening in the housing market. Demand will remain strong because of the challenges of getting mortgages and higher debt payments and people's fear of buying because values will decline in six months to a year, he said.

McAuliffe said he foresees more construction of garden apartments because commodity costs for lumber and drywall are coming down with a drop in home construction.

"That is a sector we are very bullish on," McAuliffe says. "When you look at the demand for the apartment sector, you have to look at two areas — one is the existing tenants that you have and the other is the demand for space. Obviously, we feel very confident on renewals. We have already seen signs where it is increasing, and we expect that to continue because of the ability to get financing today is more challenging because you need higher debt payments. You all know the fear factor that if you are going to buy a home today and in six months or a year from how it is worth less."

The office market is solid because of the inherent value of leases, lack of supply coming online and strong corporate earnings. The warehouse and distribution market is expected to slow with vacancy increasing, he says.

The retail market is one that McAuliffe said has peaked and has a lot of supply threats.

Hurwitz said he doesn't agree with that assessment of the retail market.

"The supply pressure in retail doesn't mean it's overbuilt," Hurwitz said. "It means we are under demolished. If you look at our vacancy rate, they can move a little bit, but they don't move very much because most retail has 10 percent or less of spec space."

Availabilty of credit: The fallout of the credit crunch on the housing market has many concerned that future development will be slowed in Las Vegas and other locales, but many of the experts don't think that will be the case.

Sturzenegger says interest remains very strong among pension funds, insurance companies, private equity investors and foreign investors.

"There is a lot of money lined up on the sidelines trying to figure out a way to get back into real estate," Sturzenegger says. "It's probably not as much as we had in May, but they just don't know where to come into the market."

What the market faces today is a debt problem, Sturzenegger says.

The big financial institutions committed to loans in April through June but stopped selling the debt and found themselves with a real large inventory of real estate loans that they couldn't sell for prices they thought they could. Once those loans go through the system, the real estate lending market comes right back in.

"The reason I feel so confident about it is because there is so much liquidity," he says. "We have a pricing problem, not a credit problem. We just need to find out where the right price is. You will see as much as $50 billion in real estate loans go back into the market between now and the end of first quarter of next year, and we will have a more liquid real estate market once again."

Election impact on real estate: While there's plenty of attention focused on capital markets, the economy and housing industry for its impact on real estate investment and development, add one more item to the watch list — the 2008 presidential election.

Daniel Hurwitz says the election's outcome will have a big impact on real estate.

"I think there is a perception that if the Democrats are going to come in and there is going to be a massive overhaul of tax policy," Hurwitz says. "I think you are going to see a lot of real estate hit the market. There are a lot of large private portfolios of real estate out there today that are watching that situation very, very carefully."

In other news:

Services were held last Friday for Harold J. "Hal" Ober, past president of the Southern Nevada Home Builders Association. Ober, who has an elementary school named after him and his wife, D'vorre, was a native of Pittsburgh who moved to Clark County in 1977.

He developed nearly 30 communities in Las Vegas, including the Desert Shores master-planned community. The family requested donations be sent to the Hal Ober College Scholarship Fund care of Jewish Family Service Agency; 4794 S. Eastern Ave.; Las Vegas, 89119.