With the government shutdown in full effect and ahead of this Thursday’s critical debt ceiling deadline, let’s take a breath for a minute to examine the potential effects on commercial real estate.
Now, it’s important to have some perspective on this subject and review our history over the last two decades. The debt ceiling has been raised 42 times since 1980. When you listen to the cable TV pundits yelling at you on a nightly basis, they make it seem that this is not something that has happened very often. The national debt has ballooned over that time period, from approximately $0.91 trillion at the end of 1980 to $16.70 trillion at the end of August 2013. If the debt ceiling is raised this week, it will mark the sixth time it has increased under president Obama. That compares to just four times under Bill Clinton’s watch, a whopping 17 times under Ronald Reagan and seven times for George W. Bush.
The stock market has, surprisingly, shrugged off most government shutdown related news. Absent a few down days, the market has stayed relatively steady since its big jump, when the government extended its bond buying program. The 10-year treasury had been creeping up all year and touched a high for the year of 2.98 on Sept. 5. Once the Federal Reserve announced it was extending its buyback program, the 10-year dropped back to the 2.60 – 2.70 range and has remained there since.
China made the headlines this morning by calling for a “de-Americanized” world order. When the largest holder of U.S. Treasuries, approximately $1.28 Trillion, starts making statements like that, it makes you sit up and take notice.
It has been a little more than two years since the United States credit was downgraded. We stand to risk another downgrade if Washington can’t get its act together soon.
So what does all this mean to commercial real estate in the near term?
Real estate is still an extremely attractive asset class. It’s a tax shelter, it’s often a hedge against inflation and it’s a tangible asset that can be improved. Government shutdown or not, people still needs apartments to live in, malls to shop at and offices to sit in. Unless the credit markets are seriously disrupted by the infighting in Washington, we will not have a major impact in the short term on the commercial real estate market. If anything, the uncertainty in Washington should extend the current rally in real estate because the government will be forced to manipulate the mortgage market by buying bonds and keeping the interest rates artificially low.
If I had to make a prediction, I believe the government will come to an agreement to increase the debt ceiling at the last minute and get the government back to work. We’ll see a big rally in the equities market and the government will continue to buy bonds to spur economic growth. Despite the catastrophic headlines, the real estate market should continue to roar along well into 2014.
For those of us fortunate enough to be in the middle of the industry, we should be working double time to take advantage of this frothy deal making environment.