TONY THOMPSON
Chairman and CEO
Thompson National
Properties
1. UCLA all the way. The
Bruins win the National
Championship.
2. I predict that the
prime interest rate will
hit 3% in 2009.
3. Congress will pass
the so-called “new hire
tax credits,” which will
have the effect of providing private, small business with
more incentives than big business.
“Prime interest rate will hit 3% in 2009.”
LEW FELDMAN
Partner & Los Angeles
Office Chair
Goodwin Procter LLP
1. We are in the Valley
of the Shadow of Debt.
What remains is dark and
formless. In 2009, we will
experience continued
downward pressure on
real estate prices in all
asset classes. The conspicuous absence of debt will
require those with equity or assets to decide whether the deflationary environment of 2009 is a good point of investment
entry or asset exit based on real estate fundamentals and the
horizon for ROL: the Return of Leverage. Narrowing of the
bid/ask for real estate assets depends upon whether the seller
or the buyer believes debt is somewhere over the rainbow.
2. It will be a challenging year for the commercial, industrial
and residential real estate sectors. The commercial market will
suffer from decreasing rental demand due to increasing unemployment on both Main Street and Capital Markets Alley
(Wall Street is so full of potholes at this point, it’s closed for
repair). Think tanks and federal estimates project GDP for Q4
’08 at - 4. 5 annualized, Q01 ’09 at - 2.3%, Q2 ’09 at - 1.0%, and
a turnaround beginning in Q4 ’09 to Q1 ’ 10. California will
be hit harder than the rest of the nation, with unemployment
approaching 10% during the first half of 2009. Vacancies in
major gateways, such as San Diego, Los Angeles, Silicon Valley
and the Bay Area, will trend up.
Industrial properties won’t escape the downturn either, as
California’s ports experience deteriorating commerce due to
a reduction in trade as consumer demand for American goods
wanes due to a stronger dollar and a world-wide recession. (On
the other hand, 2009 will be the Year of the Flat Screen, as prices
for imported foreign electronics drop precipitously.) For the single-family residential market, there is an 11-month supply and a
three-month demand imbalance. Prices will continue to decline
another 10% to 20%. California may suffer more than the rest
of the nation in this regard. The supply/demand imbalance will
continue throughout 2009, and real estate investors and home-buyers will continue to search for the bottom of the market.
For the apartment markets, luxury units will experience slowing rent increases due to white collar employment reductions.
The redundancy of for-sale housing converted to interim rentals will keep secondary and tertiary market lease rates in check
as well. Capitalization rates will continue to rise due to stricter
underwriting standards for acquisition loans and rising capital
requirements for apartment financings.
3. One can expect more legislative proposals from the President-elect and the Treasury Secretary, as well as monetary easing
to 0.75% on the Federal Funds Rate to make debt cheap and
available, and fiscal stimulus intended to give consumers money
to buoy spending. Presidential-elect Obama has a national mandate to respond quickly to the current economic situation much
in the way that soon-to-be former President Bush had the nation’s full confidence to respond to 9/11 in a sweeping, forceful way. The first hundred days have already begun, with the
historic appointment of new economic and Treasury advisors
prior to Dec. 1, with legislation to be introduced prior to the inauguration. What will unfold is uncertain. What is certain is that
$700-billion stimulus program will be a drop in the bucket of
what is needed to move the $61-trillion US economy to the positive. The fiscal stimulus package will be larger than currently
advertised—at least $500 million. The total federal investment
in programs and shoring up of the credit markets will top $5 trillion as we see homeowner loans backed by the federal government, bank balance sheets backed by the federal government,
insurance and manufacturing business balance sheets backed by
the federal government, and conditional reorganization plans
backed by the federal government.
“In 2009, we will experience continued
downward pressure on prices.”
Infrastructure programs will be introduced to mimic the New
Deal. But there might be a twist or two. To bolster state coffers, California’s government may be tasked to administer the
state’s infrastructure program and perhaps be given authority
to issue tax-exempt debt backed by a federal government revenue stream to enable lower interest rates through double tax-exempt debt sales to California residents and institutions. These
programs require a two-year lead time to have an impact on the
economy of the state and the generation of jobs. Clean tech,
wind and solar legislation may create new demand for land, but
likely not enough to stabilize values at more than current depressed levels.—SOCAL
