Berkeley Economist Foresees Another Dip into Recession in
'03
Thomson Media - 2/19/2003
Ken Rosen, a professor at the University of California,
Berkeley, believes that there is a 60% chance that the
economy will slide back into recession in 2003 and a 40 %
chance of a "slow recovery." Speaking at the Commercial
Mortgage Securities Association's CMBS Investors Conference
here, Mr. Rosen, the keynote speaker at the conference, said
that the key to real estate demand is job creation and that
another round of job cuts could cause the U.S economy to
slip back into recession ven in the case of a recovery
though, Mr. Rosen believes that the unemployment rate will
edge up to 6.5% this year. What might happen if there is a
war in Iraq will also impact the economy, Mr. Rosen said.
"If things go well in Iraq, oil prices could go down and
this is an indicator that things will go well (with the U.S
economy) in the second half." The bad news for the mortgage
industry is that as the economy recovers, today's very low
interest rate environment will not be sustained. Mr. Rosen
expects that interest rates on the 10-year bond will rise to
the 5.5%-6% range in this scenario. However, if the economy
does not recover, it will be in the 3%-3.5% range. He
believes that there is still room for the Federal Reserve to
cut interest rates further if the economy does slide back
into recession. Although Mr. Rosen had expected to see
delinquencies on commercial mortgages go up in 2002 - they
did not. He still expects to see more stress on commercial
mortgages in 2003 and the delinquency rates on these loans
to rise to 2.5% to 3% this year. He is already starting to
see foreclosures in Silicon Valley and expects them to go up
in other markets too. Mr. Rosen sees no sign of the
technology sector coming back this year, with the Seattle
and San Francisco office markets still negative. He sees the
full-service hotel sector and the suburban office sector as
loss sectors. In a related panel session on the office
sector moderated by Mr. Rosen at the CMSA convention,
participants were particularly pessimistic about the outlook
for office markets with a heavy high technology
concentration. John Cushman, chairman, Cushman & Wakefield,
said that the issue of sublease space has become a "whipping
boy." Mr. Cushman expects that 2003 will remain "volatile
and erratic" for the office markets, with sublease space
making up 25% of all available space and 40% of available
space in the Silicon Valley area. He expects that San
Francisco, which he believes to be the most out of balance
market, will not see any real recovery until 2006-2007. Last
year, downtown Washington, D.C. and downtown Los Angeles
were the only two office markets with positive absorption,
according to Mr. Cushman, and now only downtown D.C. remains
on this list. The Washington, D.C. office market should
therefore "be on everybody's list" of markets in which to
own or finance properties, he said. As for markets with the
highest net negative absorption, Mr. Cushman identified
Detroit, Denver, Downtown Manhattan and St. Louis. Casey
World, chief investment and corporate development officer,
Trizec Properties, sees sublease space as a real issue, a
symptom of a lack of corporate demand." Striking a negative
note on the San Francisco office market, Mr. Wold noted that
in the San Francisco area, rents that went up from $30 per
square foot to $100 per square foot during the boom are now
back in the $30 range. In the case of the Midtown Manhattan
office market though, class 'A' office rents that went up
from $40 to $80 per square foot when things got very hot in
2000 are now back in the $60 range, Mr. Wold said. Marsha
Williams, chief financial officer, Equity Office Properties,
noted that office markets with a heavy technology
concentration - such as Seattle, San Jose and the entire Bay
Area - continue to be tough. She is hopeful though that if
there is job growth this year, they might pick up. David
Schulman, managing director, Lehman Brothers, expects that
if interest rates go up, there will be some rise in
commercial mortgage delinquencies, particularly in
technology-intensive markets. "When the economy is back, a
lot of markets that are lagging will see owners throw in the
towel," he noted. Mr. Rosen does not believe that the Bush
administration proposal to eliminate double taxation on
dividends will impact real estate investment trusts since
most investors invest in REITs through pension funds. "We
think that REITs are still a pretty good value," he noted.
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