U.S. Economy to have effect on Commercial Real Estate
The following article from a BMO economist is an interesting read. There's been alot of speculation whether the down turn in the U.S. economy will effect Canada. While we all know it will, the impact on real estate specifically will be time sensitive. We wish we all had a crystal ball.
Here's the read:
In further evidence of a U.S. recession, retailers suffered their worst month in five years in January, which undoubtedly will have broader implications on the economy and financial distress. Credit card usage is down, shopping centre traffic is down and online purchases have slowed. Even gift card redemptions were disappointing in January following a disappointing Christmas. Anecdotal evidence suggests consumers are using gift cards to finance purchases of staples rather than treats. The retail slowdown sends shock waves to retail landlords, commercial construction, container ports and U.S. and global manufacturers of consumer products. Moreover, commercial mortgage-backed securities (CMBS) have declined in value and banks are tightening credit to commercial developers as loan losses are set to mount.
While Chinese officials may be pleased that their economy is slowing from the overheated pace of 2007, G7 countries cannot afford to see the U.S. consumer pull back.
Major U.S. chain stores have announced layoffs and store closings. For example, Macy’s Inc. announced 2,300 layoffs, Home Depot is cutting 500 jobs and since December, retail chains have announced plans to close at least 900 locations, with many more to come. According to the International Council of Shopping Centers, an estimated 5,770 retail locations will close this year -- a 25% increase over 2007, and the highest figure since 2004. Women's specialty retailers, which have been slumping for more than a year, have unveiled plans to cut more than 1,000 jobs as a group.
Commercial real estate activity will soften as retail vacancy rates have increased over the past year. The Federal Reserve's latest survey of senior loan officers indicates 80% of domestic banks tightened lending standards on commercial real-estate loans in the past three months -- the highest level since the question was first asked in 1990. In January, no commercial mortgage-backed securities (CMBS) -- pools of commercial real-estate loans -- were issued. According to industry sources, it’s the first time that this has happened since October 1990.
With an eerie similarity to the collapsed residential CDO market, the credit default rates on CMBS are rising, tripling since the start of the year on CMBS originated in 2005 and early 2006. Commercial loan losses at banks are set to rise sharply.
Nonresidential construction has been an important cushion for the U.S. economy. This year that cushion will be gone, triggering another dampener on construction employment.
Container traffic is also down, reflecting souring expectations for future retail sales and attempts by merchants to hold inventories down. Advertising has slumped as well, negatively impacting newspapers and magazines.
Canadians may benefit with broadened access to American retailers as many are opening their online stores to international shoppers.
Washington’s tax rebate checks are intended to spur U.S. consumption, but most retailers are leery of a meaningful impact. Consumer confidence is way down and rising job losses will encourage shoppers to tighten their belts. The Fed is expected to further cut interest rates when they meet again on March 18, but recent Fed talk suggests that inflation worries have not disappeared and the FOMC might be reluctant to jump in too aggressively this time having already reduced rates in giant steps the past two moves.
Dr. Sherry Cooper
Executive Vice-President, Global Economic Strategist, BMO Financial Group
Chief Economist, BMO Capital Markets & BMO Nesbitt Burns