Friday Letter 'Quite worried' vs. 'paranoid optimism' at ULI

At a major property event in San Francisco, industry professionals debated the drag that unemployment will have on US real estate value recovery. 

In his 1992 presidential election campaign, Bill Clinton famously declared “it’s the economy, stupid”. As US real estate investors survey the crisis confronting them in 2009, the warning has become “it’s job growth, stupid”.

Just today the US Bureau of Labor Statistics said national unemployment had breached the psychologically important 10 percent mark – its highest rate since 1983. With President Barack Obama predicting there will be more pain “in the weeks and months to come”, attention is increasingly turning to the US’ ability to pull itself out of the employment doldrums and once again start creating jobs.

Such job growth – or the lack of it – was certainly a talking point at the 2009 Urban Land Institute fall conference in San Francisco this week. After all, it is job creation that commercial real estate investors rely on when it comes to filling their buildings and space.

“It’s a problem for the whole economy,” Ken Rosen, chairman of University of California at Berkeley’s Fisher Center for Real Estate and Urban Economics, admitted during one panel. “I’m really quite worried about that issue.”

GE Capital Real Estate’s Ron Pressman added to the debate warning investors wouldn’t see a “fundamental shift” in occupancy rates and rental growth until the US saw a return of job growth, and unemployment ideally falling to the 5 percent to 6 percent range. “We’re a long way from where I’d like to be,” he explained, becoming a lone voice on ULI’s capital markets panel to predict “significant” negative absorption in US real estate in 2010. “It’s going to be pretty tough going” for the next couple of years, Pressman told more than 6,000 delegates.

Unemployment was also a noted as a “big fear” in the minds of real estate professionals questioned for the latest ULI and PricewaterhouseCoopers emerging trends report. The survey, released yesterday, on the US real estate market made for generally grim reading.

A commercial real estate bottom was expected in 2010, marking one of the worst times for investors to sell properties in more than 30 years. For cash-rich investors it could prove an investment opportunity of a lifetime, but ULI delegates cautioned the low values have to be viewed in the context of a macro picture of “lacklustre” economic recovery, characterised by weak job growth. “[Slow job growth] will hamper the pace of any real estate market resurgence, which probably cannot gain much traction until late 2011 or 2012.”

The months, even years, ahead will be tough going for many real estate investors as they watch the progress of the US economy out of recession. Leaving San Francisco today, ULI delegates hopefully took to heart the message from former editor-in-chief of Bill Emmott who urged people to be “realistic but positive”.

“There is much we do not know, but new situations bring as many positive possibilities for growth and change as negative ones,” Emmott said. “Paranoid optimism is the right feeling to have as we move forward.”