Shake, Rattle & Roll

By Robert Bach, National Director of Market Analytics, Newmark Grubb Knight Frank

What should we make of the economic and financial quakes since the beginning of the year? Are they a minor aftershock more than five years after the subprime bubble burst or something more? Consider the following:

• The Dow Jones Industrial Average and the S&P 500 are down, respectively, by 7.3 percent and 5.8 percent year-to-date through Monday, Feb. 3, dragged lower by plunging currencies in emerging markets.
• The 10-year Treasury yield, widely expected to rise by 50 to 75 basis points this year, has fallen by more than 40 bps year to date, closing Monday at 2.6 percent.
• U.S. manufacturing activity slumped last month with the Institute for Supply Management’s manufacturing index falling from 56.5 in December to 51.3 in January, barely above the break-even level of 50. The new orders component, a leading indicator of production, plunged from 64.4 to 51.2, the biggest one-month drop since December 1980. The ISM index has a shorter lag time than many other indicators and very is closely watched for evidence of turning points in the economy.
• Job growth in December registered a disappointing 74,000. When it was announced early last month, analysts thought it was an anomaly, but could it signal something more ominous? Watch for the next release this Friday at 8:30 a.m. EST.

My point here is not to suggest the next recession is at hand, because I don’t think it is. But allow me to make two observations:

• Recessions tend to approach suddenly and often take economists and others by surprise. Businesses including real estate investors and landlords should keep that in mind. Recently I spoke with a landlord who had kept rents high through the recovery, expecting the market to catch up. While that might be the right strategy, the landlord should be aware of the risk when (not if) the economy downshifts – namely being caught with a high vacancy level as tenants move to the sidelines, unable to fill space at any price.
• Commercial real estate as an industry moves slowly and deliberately compared with the financial markets, which trade in real time and are subject to increasing volatility as capital moves around the globe at lightning speed. There will be even more volatility than usual this year as the Federal Reserve tapers its bond purchases with the goal of ending them by year-end. While the volatility may take a toll on business confidence and give pause at times to tenants and investors, the outlook for commercial real estate still looks good – another year of moderate economic expansion, gradual leasing market recovery, and increasing investor demand for properties.