Guest column by Herb Tousley, director of the Master of Science in Real Estate Program at the Shenehon Center for Real Estate in the College of Business at the University of St. Thomas in St. Paul, Minn.
Economists Say Recovery Started 15 Months Ago, But Brokers Say Tenants Are Still in Cost-Cutting Mode
The above was a headline from an article by Mark Heschmeyer in a recent issue of the CoStar Advisor Newsletter. That headline certainly seems to ring true in the Twin Cities’ retail and office markets. With a few exceptions most of the sub-markets in the Twin Cities are still seeing higher than normal vacancies and declining rents. Although many people in the commercial real estate industry feel that the worst may be behind us, many local companies are being very cautious before they consider rehiring laid off employees or expanding into new space or additional locations. They are not convinced that the recovery is “for real,” and they are uncertain as to what some of their future cost structure is going to look like due to uncertainty around heath care costs and taxes. Heschmeyer goes on to quote Scott Abernethy, a senior vice president at Cassidy Turley in Cincinnati.
“Companies in the past two to three years have downsized and extended their leases; these companies do not have excess space,” Abernethy said. “However, many firms with leases farther out in the future have excess space that they can’t unload. If the economy improves, they feel they can backfill that excess.”
The other problem, Abernethy said, is that the responses to the recession have made it harder for tenants to know what expansion might cost them.
“The good news is that they are no longer cutting staff, but most companies feel like they can’t expand because they just don’t know what new employees will cost,” Abernethy said. “There is a large amount of confusion as to health care, employee benefits and taxes, and companies just can’t project their future costs of doing business. Once government policies are understood by the businesses, they will then know what they are dealing with, and will start expanding.”
Similar opinions were also expressed at the recent CCIM Symposium by Dr. Mark G. Dotzour, chief economist and director of research at the Real Estate Center at Texas A&M. His presentation was titled The Economic Outlook For Investors and Decision Makers. In his talk he made the following points:
* There can be fits and starts that look like the economy is turning the corner.
* The negative comments during political campaigns can damage public confidence
* The uncertainty of government regulation is a killer to business activity.
* American small business owners are still frozen with uncertainty and sitting on cash.
* Small business hiring is essential to offset weakness in the public sector
The bottom line for recovery is that it is still all about the jobs. The recovery will start really start to take off when these uncertainties start to clear up and small- to medium-sized businesses feel confident enough to start hiring. The thing to watch is the employment growth numbers. When they start to move you will know that we are really on the way to recovery.
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