CRE Midwest

Economy set to improve in 2011, but at modest pace

| markt

The economy is set to grow in 2011, but it won’t be at the clip that the U.S. needs to restore what most would deem a healthy market, according to an area economist.

The economy is set to grow in 2011, but it won’t be at the clip that the U.S. needs to restore what most would deem a healthy market, according to an area economist.

“The economy will grow, but the growth will be anemic and it won’t restore confidence,” said Michael Miller, associate professor of economics at DePaul University, at the Chicago Association of Realtor’s annual economic forecast event. “Goods will be created, but it will not be enough to satisfy the market.”

Miller noted that the economy has been creating jobs, most recently adding

103,000 new jobs in December of 2010, which is good, but the problem is that the pace is too slow to create any noticeable difference in the overall economy. If GDP growth maintains its current pace, less than 3 percent, it will not create enough new jobs to both accommodate the currently unemployed and those entering the job market for the first time. At its current rate, GDP growth is only creating enough jobs to match the number of workers entering the labor pool each month.

In contrast, the deep recession of 1981 and 1982 experienced robust GDP growth of 7-9 percent for numerous quarters once the recovery began. All signs point to a much more muted recovery from the most recent recession.

He does predict that the U.S. economy will pick up in the second half of 2011, but that it will probably end the year with Real GDP growth between 3-3.5 percent and an unemployment rate between 9-9.2 percent, a much higher unemployment rate than Miller would like to see. If 2011 ended with an unemployment rate around 8 percent, it would signify impressive growth, but that seems to be a very remote chance, he added.

First-time jobless claims are the lowest that they have been in nearly two years, but that is at a level where the previous recession of 2001-2002 peaked. It may seem good relatively, but it is far from a robust economy, said Miller.

Major banking institutions are no longer in danger of collapsing, but they have not begun to lend at a rate that would stimulate the economy.

“Banks and corporations have plenty of money, with banks having an excess of $950 billion in reserves,” said Miller. “But there is still a pervasive fear of commitment from lenders.”

He noted that corporations may not be in a hurry to spend for several reasons; one of them being that worker production has shot up tremendously during the recession as fewer workers are tasked with maintaining the status quo.

Joe Cosenza, vice chairman of Inland Real Estate Group, said that corporations are in no hurry to expand simply because there is no demand.

“Corporations will not just create jobs because they have money,” said Cosenza. “They will wait for demand to determine that.”

Commercial Real Estate

Cosenza’s firm was quite busy the last few years, purchasing $3.4 billion worth of properties in 185 separate deals in 2009 and 2010. The firm attacked a weak market with a flurry of activity, which is why it may seem surprising that as the economy recovers, Cosenza has turned somewhat bearish on specific property purchases. Cosenza concluded that in 2011 he will not be shopping for properties directly, but instead, focusing on buying debt from lending institutions to obtain property titles. The property class tied to that debt is arbitrary in his eyes. It is the discount amount that he can receive on defaulted loans that matters.

“Buy someone else’s debt at a discount,” he said. “Take down the inflationary original purchase price and wipe out some of the mortgage. That will bring it down to a real number that will make money in the future.”

Despite certain opportunities in commercial real estate, Cosenza believes that conditions are hardly ideal and classifies 2011 as “still scary.”

Cap rates have compressed, but that is more the result of money flowing into the market place from equity groups that have to make investments rather than actual reflected value of properties, he said.

Retail is still struggling as consumer shopping habits have changed and technology continues to transform the industry. While consumers have embraced on-line shopping and gadgets such as Kindels, Cosenza sees them as resoundingly negative for the real estate business. As high-profile retailers such as Borders teeter on the edge of bankruptcy, an already fragile industry may take another blow.

“Retailers are adjusting from cathedrals to chapels,” said Cosenza. “Vacancy is at 13 percent, up from 12.7 percent. That is the highest rate since 1991 when I got into the retail business.”