Published Monday, December 17th, 2012, by Mike Sullivan.
You can hardly turn on the news these days – or log on to the Internet – without hearing about the so-called fiscal cliff. But what does the fiscal cliff mean for your business center?
Just to be clear, the fiscal cliff is a term used to refer to the economic effects that could result in tax increases, spending cuts and a corresponding reduction in the U.S. budget deficit beginning in 2013 if existing laws are not changed by the end of 2012.
A new report from commercial real estate services firm Cassidy Turley and chief economist Kevin Thorpe proposes three scenarios for the resolution of the issues that loom with the so-called fiscal cliff.
Unfortunately, in two out of three scenarios, the commercial real estate market suffers. The good news is that if policy makers achieve the reforms required under scenario 3, commercial real estate markets should improve. Let’s drill down into the analysis as it relates to business centers.
In the first scenario, where nothing is done to mitigate the impact of budget sequestration and tax increases, we fall off the fiscal cliff. If that happens, Thorpe forecasts that demand for U.S. office space will drop by 2.6 million square feet of net absorption in 2013. Office vacancy rates would rise by 20 basis points, and rents would move sideways at near-bottom levels. However, Thorpe says that there is only a 30% chance of this scenario occurring. It’s difficult to determine how this might impact business centers.
On the one hand, tenants may opt for shorter-term leases rather than longer-term commitments, which would be a boon for business centers. On the other hand, more tenants may not opt for office space at all. Virtual offices could become an alternative, which would also be a boon for business centers who offer this product. But there are too many unknowns about the long-term impacts of falling off the fiscal cliff.
In the second scenario, there would be no budget sequestration or tax increases – the current fiscal policy would be maintained. Thorpe predicts this would bring about a short-term boom in commercial real estate, with tighter vacancy rates, and rents recovering. Unfortunately, this scenario would very quickly lead to interest-rate hikes as well as the downgrading of the U.S. debt, and a credit disaster. The effect of those two moves on the commercial real estate market would be disastrous. However, Thorpe believes this scenario is lower in probability, only about 20%. Since tenants don’t need the same level of credit to lease from a business center on a short-term basis, business centers may weather part of the storm this scenario would bring.
The third scenario is the most likely one, with about a 50 percent chance of occurring, says Thorpe. In this scenario, the government would make significant reforms of entitlement programs and tax revenue. Real GDP growth would be about 2.4% in 2013, enough to potentially generate 2 million net new jobs. In this case, the U.S. office sector will continue to make reasonably healthy progress. Net absorption will clock in at 56 million square feet and vacancy could fall by 70 basis points in 2013.
This most likely scenario is the best long-term bet for business centers. After all, a growing economy is good for business.