Apr. 22 2011 - 1:16 pm
Commercial real estate demand is derived from activity in the overall economy. As the economy goes, so goes the health of commercial real estate. Improving macroeconomic readings presage a turn higher in property incomes and keep lots of distressed properties from hitting the market.
While the economy may be improving and corporate earnings increasing at a rapid clip, this doesn’t mean that companies are going to automatically increase their hiring. Large public corporations instead seem to be using their earnings to help fund stock buybacks or to make acquisitions. Unfortunately, stock buybacks don’t fill office buildings or industrial properties, only increased employee headcounts do that.
The fervor for buybacks would seem to suggest that corporations don’t have investment opportunities that meet their minimum investment hurdle rates.
Why aren’t companies able to generate the necessary returns on hiring and business investment? For one thing, we know it isn’t the cost of capital. That can’t be much cheaper. So it must be demand. Companies aren’t investing their earnings in jobs and plant and equipment because the demand isn’t great enough to generate the returns companies require.
Gross domestic product has four constituents: consumption, investment, government spending and net exports. Consumption can only drive GDP growth for so long without an increase in hiring and wages to replenish what gets consumed. Government spending is only going to decrease, both at the federal and state levels. Exports are negative. So this leaves business investment to save the day.
Commercial real estate, and the larger economy, need supply side economics to work. We previously implemented the traditional Keynesian strategies of increased government spending to offset the decreased demand. At this point there is no appetite for increased government spending to sustain the current recovery. Consumers have done their part returning to pre-recession spending levels on a nominal basis.
Corporations hold the key to the future of commercial real estate’s market fundamentals. Will companies like JPMorgan, General Electric, Bank of America, Johnson and Johnson and Microsoft increase hiring and investment? I hope so because those will be the main determinants of the rate of recovery in commercial real estate.
Chris Macke is a senior real estate strategist for the CoStar Group and a former vice president with GE Real Estate. He has 20 years experience in commercial real estate development, acquisition, leasing and financing.
While the economy may be improving and corporate earnings increasing at a rapid clip, this doesn’t mean that companies are going to automatically increase their hiring. Large public corporations instead seem to be using their earnings to help fund stock buybacks or to make acquisitions. Unfortunately, stock buybacks don’t fill office buildings or industrial properties, only increased employee headcounts do that.The fervor for buybacks would seem to suggest that corporations don’t have investment opportunities that meet their minimum investment hurdle rates.
Why aren’t companies able to generate the necessary returns on hiring and business investment? For one thing, we know it isn’t the cost of capital. That can’t be much cheaper. So it must be demand. Companies aren’t investing their earnings in jobs and plant and equipment because the demand isn’t great enough to generate the returns companies require.
Gross domestic product has four constituents: consumption, investment, government spending and net exports. Consumption can only drive GDP growth for so long without an increase in hiring and wages to replenish what gets consumed. Government spending is only going to decrease, both at the federal and state levels. Exports are negative. So this leaves business investment to save the day.
Commercial real estate, and the larger economy, need supply side economics to work. We previously implemented the traditional Keynesian strategies of increased government spending to offset the decreased demand. At this point there is no appetite for increased government spending to sustain the current recovery. Consumers have done their part returning to pre-recession spending levels on a nominal basis.
Corporations hold the key to the future of commercial real estate’s market fundamentals. Will companies like JPMorgan, General Electric, Bank of America, Johnson and Johnson and Microsoft increase hiring and investment? I hope so because those will be the main determinants of the rate of recovery in commercial real estate.
Chris Macke is a senior real estate strategist for the CoStar Group and a former vice president with GE Real Estate. He has 20 years experience in commercial real estate development, acquisition, leasing and financing.
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