Friends and colleagues of mine in Generations X and Y have been asking substantially the following question: Given all the discouraging data being generated by the real estate markets, does it make any sense today to aspire to a career in real estate development? Past visitors to this blog may expect the answer to be negative. Actually, I’m bullish on the industry’s future.
The real question is: how far out is that future? There is a plethora of data that give strong indications that the future won’t brighten overnight, no how strongly we might hope for that to happen. Here’s why:
· As the WSJ noted in an editorial on August 10, money isn’t in short supply, but confidence is. Banks are stockpiling reserves instead of lending against them. Corporations are hoarding nearly $2 trillion dollars they could invest to expand businesses, hire employees, and green the economy. But individuals and corporations “won’t invest more or take more risks amid Washington policies that are hostile to private markets and have created only greater uncertainty and higher costs for doing business”.
o That uncertainty is fueled, among other factors by:
§ Hefty tax increases starting in January, 2010 to be followed by more increases in 2013 to pay for ObamaCare;
§ The expectation that taxes will rise substantially in addition to that because of unparalleled government spending, regulatory expansion, and debt creation;
§ Thousands of pages of new laws that will be fleshed out by myriads of new regulations that have yet to be written;
§ Government policies and regulations that distort markets and create justifiable fears of the Law of Unintended Consequences;
The following factoids all came from blogs and other online sources on a single day:
· “…the rate of job creation remains less than about half of what it needs to be just to keep pace with population growth, let alone make significant progress on getting the unemployed back into jobs. Heather Boushey, Center for American Progress
· “To lower the unemployment rate on a sustained basis, jobs must increase by more than 110,000 per month if the (depressed) labor force participation rate holds steady at current levels. It will take much more than that if the participation rate stages a cyclical rebound, and the ‘discouraged’ and ‘marginally attached’ eventually do come back to the labor force.” –Jay Feldman, Credit Suisse
· “The recovery in optimism we are currently experiencing is very weak compared to recoveries after 1982 or 1975. The small business sector is not on a positive trajectory and with this half of the private sector ‘missing in action,’ the poor growth performance is no surprise.” National Federation of Independent Business Index of Small Business Optimism
· “…employers’ confidence about the economy remains weak at a time when they’re facing higher costs for health care, unemployment insurance and other expenses.” Tig Gilliam, chief executive of Adecco Group North America
· “…economic outlook is likely to deteriorate progressively starting sometime next summer.” Federal Reserve Bank of San Francisco
This discouraging data is the tip of the iceberg and continues to proliferate. What is there to be bullish about when looking to the future of the real estate development industry?
Actually, there is plenty of room for optimism. The key is to take the long view and not react daily to every data point that’s released. History, while it does repeat itself, constantly is unfolding and few things remain static indefinitely. Here’s what I see in the “tea leaves”:
· A majority of the American people understands that current government policies are worsening a bad situation. As an electorate, they will have an opportunity to begin reversing this course in November, and they will act accordingly.
· The new legislature, however, will have difficulty achieving any meaningful progress until the presidential election in 2012, as the White House and Congress essentially will experience a Mexican standoff (no immigration policy pun intended).
· However, the presence of a right-of-center legislature and the expectation of: changes in policy direction, debt reduction, tax relief, easing of regulatory burdens, and, ultimately, a different occupant in the White House will re-ignite optimism in the business world.
· The staunching of the flow of red ink in Washington, modest rollbacks of onerous regulations, and the expectation of further such actions, will result in:
o The perception that risk of uncertainty has lessened;
o Loosen up of capital markets and renewal of investment activities;
o Expansion of markets to meet increasing demand across most sectors, including real estate;
o Increasing production;
o Job growth.
· In addition, and this is key to the long view, growth through immigration and the excess of births over deaths is projected to increase the population by approximately 50 million additional people by 2030. That’s only 20 years away. Even if the population increase is only half that, they will need places to live, shop, work, play, worship, go to school, etc. Someone has to create those places.
Consequently, the role of real estate development is far from over. New demand will create new opportunities. I have heard some self-promoting wannabe pundits claim that the nature of development and its products will be vastly different from the past. I disagree sharply with the idea that the future of the industry is unknowable, and strongly suspect that these industry has-beens are hoping to find consulting gigs. But, that’s a subject for another time.
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