Published April 2003

Uncertainty a damper on economy, local market

In evaluating the supply-and-demand equation to forecast the commercial real estate market in Snohomish County, it seems the supply side is rather easy to track here just as it is in other parts of the country.

Somewhere in the development process, a building permit must be issued before a finished product can be delivered to the market. Since building permits are issued by the county or city where the property is located, they are public information. So, forecasting supply is as easy as pulling the permit record from the county or city planning desk.

The harder part of forecasting commercial real estate is measuring the demand side. Economic activity that translates into job creation is really the meaningful definition of demand for commercial real estate investors. Especially with rental housing product because there is a direct correlation between job creation and demand for housing.

Based on a review of building permit activity in Snohomish County, the pipeline of supply appears to be at a slow pace right now in each of the major product types. As a result, forecasting demand is where all of the attention is today. An examination of the broader economic climate to determine whether we’ll see job creation or not is, therefore, the next step to forecasting our commercial real estate market. This takes us down a path that’s a bit more complicated than calling the county planning desk to gather permit activity for the supply-side answers.

It seems the business climate can be summarized as “uncertain” these days. Uncertainty, though, isn’t the same as “more risk.” The difference between the two is best described by imagining you are standing at a street corner ready to cross. When the “walk” sign turns on, you know more or less what to expect and you can assess the relative risk. Uncertainty, on the other hand, is like crossing that same street in the dark with no signal. You really don’t know what to expect or how to measure the risk of crossing.

In uncertain times, people don’t make decisions — of any kind. The better move is not to cross the street at all.

Nationally known economist Brian Westbury recently defined this uncertainty as the combination of terrorism, corporate scandals and the Middle East situation. “They’re a wet blanket laying over our economy.”

All of the conditions seem to be ripe for a national recovery over the next five years if we can just get this wet blanket off of us, says Westbury.

Consider the underlying fundamental strength of the U.S. economy. The United States is still one of the most economically free countries in the world.

Economic freedom and the ability of capital to move within markets efficiently are true freedoms and support the strongest economic model known today. It distributes the wealth effectively through job creation and investment.

In America, a good idea can get the investment capital backing it needs and have a chance at getting to market more efficiently than almost anywhere else in the world. Existing businesses, of course, operate in and benefit from this same environment. It’s easy for us to lose track of this fundamental strength of our economy and how different we are from the rest of the world, says Westbury.

Businesses create jobs. People with jobs need offices or warehouses in which to work and apartments or homes in which to live. Job growth through economic strength is the key demand force for commercial real estate, therefore. The connection is very direct. Understanding the forces behind job growth is even more important to forecast today’s market, given that interest rates have stabilized and the supply side is rather stagnant at the moment.

Bush’s bold tax-cut plan in its current or even a watered-down form is worth an examination in this demand research effort.

The freeing up of capital from tax cuts that then has to find a place to be spent or invest may be the shot in the arm necessary to push the economy ahead and stimulate expansion.

Eighty million Americans participate in the stock market. So this investor class — about half of the adults in the country — should benefit from the tax cuts at a minimum. Whether folks save in a bank savings account, invest in the stock market or apply these funds to consumer needs, the point is the money gets injected into the markets.

Low interest rates, low inflation and an economy that is still growing slightly despite the “wet blanket” effect are all factors that combine to remind us that there’s really nothing “wrong” with our economy that moving out of an atmosphere of uncertainty won’t fix.

We don’t need laws to straighten out scandalous corporate executives at this point. The market taught them a lesson more powerful than government could now. So the variable to examine to understand demand in our market seems to be tied to uncertainty of terrorism and the Middle East.

When or if recovery takes shape, the resulting increase in demand for aerospace and tech products is the tangible outcome we need for it to impact commercial real estate here in Snohomish County in a significant way. Don’t hold your breath for this year, but underneath the uncertainty of this wet blanket is the same economic structure that brought us expansion in previous cycles.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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