Commentary Studies & Guides

How Will Free-Spending Government Impact the CRE Market?

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The 2020 election and the economic hardship of COVID-19 have come together to produce the most “progressive” economic policy in decades – what does that mean for commercial real estate?

The U.S. federal government has passed an unprecedented $5.3 trillion of stimulus as part of the effort to recover from the COVID-19 pandemic. Trillions more of infrastructure spending appears to be on the way, with President Joe Biden to announce details on Friday.

Democrats won control of the presidency and Congress in the November elections, but with the thinnest margins ever. Consequently, there is an urgency to work quickly because the majority could be gone in 2022, or even sooner if a Democratic senator must be replaced. At the same time, the economic havoc created by the pandemic has removed much of the concern about deficit spending that held back Democratic spending when they controlled the agenda in previous decades.

The “go big” spending packages are expected to help produce a rapid recovery, with GDP forecast to grow by 6.5 percent in 2021 and 4.0 percent in 2022, according to the Organization for Economic Cooperation and Development. If those projections come to pass, it would mark the strongest recovery since the economy grew by 4.6 percent in 1983 and 7.2 percent in 1984 following a recession in 1982.

“It’s going to be a big jolt for the markets,” says Andrew Nelson of Nelson Economists, the former chief economist for Colliers International. “There are big upside implications for the country and property markets.”

The gain for commercial real estate doesn’t come without potential pain. Rapid growth from stimulus-fueled consumer spending creates concerns about an exploding federal deficit, a rapid increase in inflation, and rising Treasury rates. Such conditions could produce an increase in the cost of capital, and potential for lower returns and distressed debt in commercial real estate. “My sense is that if we see growth in inflation, it won’t be incremental,” said Donald Sheets, a managing director at Broadsheet Capital Partners. “It will be like a fire that spreads quickly.”

In the short term, though, the economic consensus is that the relief spending is preferable than the cost of inaction. More than 70 percent of economists surveyed by the National Association for Business Economics (NABE) this month believe current monetary policy is “about right,” and only a quarter of respondents views current Fed policy as “too stimulative.”

The full analysis can be found here: https://www.cpexecutive.com/post/analysis-big-govt-spending-creates-opportunities-worries-for-cre/

 

About the author

Paul Fiorilla

Paul Fiorilla is Director of Research at Yardi Matrix and serves as volunteer Editor-In-Chief for CRE Finance World, a magazine published by the CRE Finance Council. He has more than two decades of experience as a writer and researcher in commercial real estate. He previously was an investment vice president at Prudential Real Estate Investors (now PGIM) and managing editor of Commercial Mortgage Alert.

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