They say that the leading economic indicators show that the Great Recession is over. Unfortunately the statistical evidence provides little solace for millions of Americans already out of work. Or for the millions more who worry about job security. The national unemployment rate jumped to 9.7% in August which probably didn’t help boost their confidence either.
James Smith, chief economist with Parsec Financial Management based in Asheville, N.C. says “Things are getting better every day, but I suppose the average person is not going to feel better until he or she sees a big ad in the local newspaper or on the evening news saying XYZ Corp. is hiring dramatically.”
Don’t despair, there is some good news: The ISM Manufacturing Index climbed sharply from 48.9 in July to 52.9 in August with new orders leading the advance. This was the first time in 18 months that the index posted a reading above 50, which indicates an expanding factory sector.
“The index, which goes back to 1931, is practically perfect for telling us where the economy is going three to six months down the road,” says Smith, who is optimistic that real GDP will grow at an annualized rate of nearly 4% in the third quarter and 3.5% in the fourth quarter.
Has demand dried up?
With employers continuing to shed jobs, it is office landlords across the Bay State who are taking a direct hit. Asking rents for premium tower space in Boston, at $70psf in late 2007, were approximately $50psf at the end of Q3. The rents are being hammered, the incentives, the tenant improvement packages are going up. Commissions for some of these tenant rep brokers is also going up, and so are bonuses on a per square foot basis.
The office vacancy rate in Greater Boston has climbed to 14% over the past year due to weaker tenant demand, with annual net absorption of 2 million square feet.
On the investment sales front, the near-term outlook for sellers is not good. Cap Rates are going up. Class A office, retail and industrial are now at 8%. Financial institutions are looking for debt coverage ratios to be 1.3 or higher. They want to see 10% vacancy, with 6% for maintenance.
With the John Hancock selling at .60 cents on the dollar and the Bay Colony in Waltham just missing the auction gavel, buyers are expecting opportunities. When we see offers on projects, we prep our clients and preface the discussion by saying, ‘Don’t be insulted.’ There is really no such thing as a truly insulting offer today. It’s probably 20% to 30% off the asking price, which is already discounted, but we’re making deals.
Let’s jump start
Until companies start hiring again, any talk of an economic recovery will ring hollow. So, what could be the next growth engine? The passage of a global free-trade pact could be a powerful catalyst. I was at the Tech Tuesday event at Microsoft a few weeks ago and there were many gaming (video games) companies that were looking for talent. But Boston is not just gaming, it is more. I know the president would like national health care, but the cash strapped population is looking at the price tag. Is it really a good time to be forcing this reform? Or should we be working 24/7 on getting the economy strong and then introduce health care reform when our wallets have more green?
The Doha Round of trade talks, named after the capital city of Doha in Qatar, began in 2001 to help strengthen poor nations via free trade.
If President Obama were to lock everyone in a room in Pittsburgh and say, ‘You don’t get out of town until you all agree with me that we’ve got to get Doha done by the end of the year,’ you would see a boom in commercial real estate next year. The Peterson Institute for International Economics concluded in a recent study that a Doha trade pact could inject $300 billion to $700 billion a year into the global economy.
Manufacturing, shipping and warehousing activity would accelerate in the wake of a trade pact. “You’ve got to travel to peddle your goods all over the world, so that would help drive hotels,” says Smith. Additionally, cheaper goods would benefit consumers, boost demand for retail space and generate jobs. “We would get a virtuous circle instead of a vicious circle.”
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