Impact of Spending Cuts for Commercial Real Estate, and Possible Offsets
Uncertainty is killing us. Will the debt ceiling be raised or not? Will the credit of the United States of America be downgraded or not? What unanticipated wounds may result from a potential downgrade for a fragile economy still in recovery, and for real estate investment in particular?
In his July 18 analysis of the impact of federal spending cuts for commercial real estate in Forbes on line, “$6.2 Trillion of Unintended Federal Budget Consequences for Commercial Real Estate”, Chris Macke, senior real estate strategist for CoStar Group and former VP of GE Real Estate, suggests that commercial real estate investment will drop more than we might expect as a result of budget cuts, since he shows that a sizable amount of current federal spending goes directly to private sector services, which in turn feed real estate investment.
While the federal budget increased from $823 million in 1969 to around $2.89 trillion 2009, Macke cites an actual 30% decline in the federal payrolls during that time, a decline from $6.5 million to $4.3 million as reported by the Office of Personnel Management. This represents the salaries of over 2 million personnel - even as private sector payrolls grew in the same period by 85%.
This suggests that the U.S. government has increased its practice of outsourcing – paying for services in the private sector. In defense, for instance, private sector companies like Blackwater and Halliburton have provided essential services for the military. Government contractors such as Lockheed Martin, Boeing and Raytheon supply a global military force with weapons systems and ancillary technologies. Other sectors, including consulting, healthcare, engineering, communications, I.T., construction and education all have benefitted from the growing federal reliance on the private sector. And companies in these sectors require office, industrial and retail space to function.
The implication is that reduced federal spending today will have more direct impact on the private sector economy.
Supply side economics predicts that corporate America, with record cash reserves of some $1.84 trillion, might step in to offset the reduced federal spending. Yet, we have not seen a ramping up of corporate spending to date. Even by optimistic projections, accelerated private sector spending would only offset the lowest projected federal spending reductions, in Macke’s calculations.
Public-private partnerships may offer significant new spending initiatives, however. In her article, “Pursuit of Public-Private Ventures,” Commercial Property Executive, June 2011, Allison Landa observes a growing trend of spending by these partnerships, in which cities band with private sector developers and companies to jumpstart new development, and in which private companies turn to cities for help to clear the way for development initiatives.
Cities or municipalities can offer land alternatives and strategic space usage ideas that are appealing to private firms who in turn can infuse some of their record reserves, and so, possibly make up for some of the gap in economic momentum that we are likely to see resulting from cuts of federal spending on private sector services.
Posted by Chris Campbell, Managing Director at Net Lease Capital
