Will the expiration of the Bush tax cuts, combined with the recent expiration of the Obama administration’s housing tax credit, place additional pressure on the fragile economic recovery?
The economic recovery will continue to make slow, choppy progress through the remainder of 2010 and into early 2011. While risks such as another slide in the housing market and slipping business/consumer confidence persist, a double-dip recession remains unlikely. Still, several forces will drag on growth in the near term, hampering the pace of recovery. To start, the consumer sector, which accounts for 70 percent of U.S. GDP, will remain strapped by tight credit conditions and high unemployment over the next several quarters. In addition, the extended downturn has driven a shift in consumer psychology, leading households to pay down debt and increase savings as opposed to spending disposable income on goods and services. This places the onus of transitioning the recovery into a self-perpetuating expansion cycle on businesses, which first need to regain sufficient confidence to initiate more substantive hiring and capital spending.
What is the private sector’s role in the economic recovery?
While corporate profits have soared in recent quarters, large companies have amassed record-high levels of cash, reducing their reliance on credit markets to fuel growth but also hampering the pace of the economic recovery. Small businesses, which account for nearly half of all private-sector employment, face greater challenges at this stage of the cycle and will drag on the recovery. Lacking significant cash stockpiles, small businesses continue to encounter difficulties securing credit for expansion, despite modest loosening in lending conditions recently.
Which sector or sectors of the real estate investment market are performing well?
Apartments have taken the lead in the national recovery and will likely post notable occupancy and rent gains in major markets over the next year. Very modest private-sector job growth and stronger household formation released some of the pent-up renter demand accumulated through the downturn. Improvements were broad-based, with 70 percent of all major U.S. apartment markets recording occupancy gains. As 2010 progresses, more pent-up demand for apartments will be released, particularly among the estimated 2.2 million young adults who have moved back with their parents since 2005. The outlook brightens considerably for 2011 and beyond amid expectations for improved economic growth, powerful demographic shifts supporting a surge in renter demand and limited new construction. These trends will likely result in a shortage of apartments nationwide, driving rent growth to above-average levels by 2012 or 2013.
Which property sectors are struggling?
Demand for retail and office space remains tepid, however, particularly in secondary and tertiary markets, placing downward pressure on rents and preventing owners from regaining substantive pricing power. For investors holding these assets, future capital gains tax increases could overshadow appreciation substantially, extending the hold period to break even against current net profits for several years. Investors who purchased these assets more than six years ago likely have profits to protect and may consider liquidating late this year.
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n M. Leonard is a first vice president and regional manager of the Atlanta office of Marcus & Millichap Real Estate Investment Services. Contact him at [email protected] or (678) 808-2700.
