Commercial Real Estate and the “Fiscal Cliff”: Several Reports Indicate the Industry is Bracing for January 2013

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Genesis Capital assists buyers and sellers with off market commercial real estate and notes. It tracks the commercial markets closely, and has examined several reports on the upcoming “fiscal cliff” and how it could affect commercial real estate in 2013.

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The fiscal cliff would be problematic for commercial real estate in the short term, as it would lead to reduced income streams and depressed property values because of higher vacancies and company cuts.

The pending fiscal cliff hangs in the air for January 1st, 2013. This could include $600 billion in federal spending cuts, and as several experts discuss, it could have a profound effect on the commercial real estate.

In fact, businesses nationwide are bracing for the fallout by laying off workers, reports the Washington Post, letting jobs go vacant and postponing major purchases. Commerce Department data released Thursday show business investment stalled in September, as orders for core capital goods such as machinery and equipment plateaued at $60.3 billion.

As reported at, national research director at Delta Associates, Sandy Paul, analyzes that the fiscal cliff would be problematic for commercial real estate in the short term, as it would lead to reduced income streams and depressed property values because of higher vacancies and company cuts. On the positive side long term, however, reduction in annual deficits coming from sequestration could lead to lower interest payments, which, in turn, could lead to greater investment eventually. This could also attract foreign interest in U.S. commercial real estate assets, driving up pricing.

As CoStar reports, commercial real estate executives nationwide have different views on the fiscal cliff. The group queried a number of commercial professionals – in the end, opinions depended on which markets and which asset types the professionals were involved in. Most felt there was cause for alarm.

There is little doubt that, in the short term, sequestration will end up having an impact on commercial real estate, in the form of increasing vacancies as companies put off making decisions. And analyst Paul says that sequestration would impact both the office and industrial sectors especially hard.

A recent report from commercial real estate services firm Cassidy Turley and its chief economist Kevin Thorpe proposes three scenarios for the resolution of the issues that loom with the so-called ‘fiscal cliff'. Unfortunately, in two out of three scenarios, the commercial real estate markets suffer.

In one scenario, where nothing is done to mitigate the impact of budget sequestration and tax increases – i.e., we ‘fall off the cliff’ -- Thorpe forecasts that demand for U.S. office space drop by 2.6 million square feet of net absorption in 2013. Office vacancy rates could rise by 20 basis points (lack of new supply would prevent a spike), and rents would move sideways at near-bottom levels. Thorpe gives this scenario about a 30% chance of occurring.

In another scenario, there would be no budget sequestration or tax increases – current fiscal policy would be maintained. This could bring about a short-term boom in commercial real estate, with tighter vacancy rates, and rents recovering. Unfortunately, this scenario would very quickly lead to interest-rate hikes as well as the downgrading of the US debt, and a credit disaster. The effect of those two moves on the commercial markets would be disastrous. Thorpe gives this scenario about a 20% chance.

In scenario 3 which Thorpe gives a 50% chance of occurring, the government would make significant reforms of entitlement programs and tax revenue. Real GDP growth would be about 2.4% in 2013, enough growth to generate 2 million net new jobs. The U.S. office sector could continue to make reasonably healthy progress. Net absorption will clock in at 56 million square feet and vacancy could fall by 70 basis points in 2013.

“No one really expects the cliff to occur, and yet everyone seems to be treading water, in total wait-and-see mode,” said Thorpe in Commercial Property Executive. There is uncertainty, and all eyes will watch the moves in Washington and how this will affect commercial real estate industries.

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