Mid Term Elections & Commercial Real Estate

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Effects of the 2010 mid-term elections on commercial real estate

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Mid Term Elections & Commercial Real Estate

  1. 1. 2010 Mid-Term Elections: Implications for Commercial Real Estate cassidyturley.com | 1 US Total Public Debt Outstanding Since World War II, the US House of Representatives has changed political parties seven times. Last week’s mid-term elections turned the shift of political power for the next two years in favor of the Republican Party in the House. With a divided Congress and opposing political parties controlling the Executive and Legislative branches, there are numerous implications for commercial real estate. Cassidy Turley Research provides a brief outlook on the mid-term elections in relation to federal debt, legislation, US employment, and the commercial real estate markets. Federal Debt, Income & Expenditures: Large national debt is a hot topic for the 112th Congress. Currently, public debt is estimated at $13.7 trillion, equating to $116,647 for every US household. The ratio of total public debt to national GDP stands at approximately 94 percent, compared to the 30-year average of 58 percent. To address debt, government will need to examine federal revenues and spending. Future tax revenues will factor heavily on public debt. Bush era tax cuts are set to expire on December 31, 2010. Extension of these tax cuts will have a significant impact on future federal income projections. Federal receipts decreased from 2001 to 2003 following the implementation of President Bush’s tax cuts, but have risen 4.3% annually, on average, since 2003. Though no definitive decisions have been made by Congress, it appears that some form of continuing tax cuts will be implemented, at least in the short-term. There is no doubt that federal spending plays a significant role in the US economy. Federal outlays currently account for an estimated 19% of national GDP. Federal spending continues to grow. Over the past year, federal outlays increased 2.7% annually, slightly higher than the 30-year average increase of 2.5%. A divided government will need to decide how to address federal spending and determine its impacts on the economy. Implications: The 112th Congress is faced with a considerable amount of federal debt. Large programs, such as defense, are targets for spending cuts. Funding for specific programs significantly impacts procurement expenditures for private sector contractors. Additionally, changes in federal government employment affect the private sector. History shows that 1.1 to 3 contractor jobs are created for every federal government job. Depending on how aggressively Congress implements spending cuts, locations that rely heavily on federal contracting could be strongly impacted. Looking back over the past 25 years, a divided or unified government has not made a significant impact in federal spending. The Federal Government has continued to increase spending, regardless of political party control. The main issue continues to be which federal programs or initiatives are retained or cut. Legislation: In addition to debating extended tax cuts, Republicans and Democrats will continue to deliberate major legislation such as healthcare reform and Wall Street reform/consumer protection. The Federal Government and some private sector companies have started to gear up for implementation of these bills, though programs related to these bills have not been fully funded. For example, the US Securities and Exchange Commission signed a 900,000 square foot office lease in Washington, DC in anticipation of increased employment for financial oversight and consumer protection. November 2010 $0 $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 $16,000,000 Jan-80Jan-82Jan-84Jan-86Jan-88Jan-90Jan-92Jan-94Jan-96Jan-98Jan-00Jan-02Jan-04Jan-06Jan-08Jan-10 billions$ Federal Government Receipts & Outlays (in constant FY 2000 dollars) $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 e 2008 e 2010 e billions$ 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% Receipts Outlays Outlays as Percentage of GDP Sources: Bureau of the Public Debt Online, Moody’s Analytics Sources: Government Printing Office (GPO)
  2. 2. 2010 Mid-Term Elections: Implications for Commercial Real Estate cassidyturley.com | 2 National Office Using Employment (SA) November 2010 Implications: The outcomes of issues such as these will affect both public and private sector hiring and thus demand for commercial real estate. Implementation of healthcare and financial reform could affect the medical, IT, accounting, and legal sectors, driving demand for office and medical space and data processing centers. Additionally, changes in income and capital gains taxes could affect when and how commercial property is acquired and sold. Employment: The national employment outlook remains mixed. Though still plagued by a record-high 9.6% unemployment rate, US non-farm employment improved in October 2010 by adding 829,000 jobs on a seasonally-adjusted basis compared to a year ago. After reaching a low point in 3Q 2009, national office-using employment (mainly the Professional & Business Services and Financial Activities sectors) is projected to improve, adding an estimated 700,000 to 800,000 jobs annually over the next five years. However, there is the likelihood that national office employment will continue to decline for the next two to four quarters if the economy is slow to recover. Implications: Decisions made by a split government regarding additional financial stimulus and public spending will impact employment projections. Chances are many major decisions will not happen in the near-term with a divided government. As a result, this may only delay decisions by some companies to hire new employees and acquire additional space. A “lame duck” government may also hinder improvement of consumer and business confidence. Business and consumer confidence have demonstrated to be highly correlated with employment and office space demand. Prolonged levels of low confidence will only delay a full recovery in the commercial real estate markets. Nonetheless, national office-using employment will add an estimated 3.7 million jobs over the next five years. This equates to 550 million to 925 million square feet of demand for existing or additional office space. Disclaimer This report and other research materials may be found on our website at www.cassidyturley.com. This is a research document of Cassidy Turley in Washington, DC. Questions related to information herein should be directed to the Research Department at 202-463-2100. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Cassidy Turley is a leading commercial real estate services provider with over 2,800 professionals in 60 offi ces nationwide. The fi rm completed transactions valued over $13 billion in 2009, manages over 420 million square feet on behalf of private, institutional and corporate clients and supports over 25,000 domestic corporate services locations. 15 17 19 21 23 25 27 29 2000Q 12001Q 12002Q 12003Q 12004Q 12005Q 12006Q 12007Q 12008Q 12009Q 12010Q 12011Q 12012Q 12013Q 12014Q 12015Q 1 MillionsEmployed 15 17 19 21 23 25 27 29 2000Q 12001Q 12002Q 12003Q 12004Q 12005Q 12006Q 12007Q 12008Q 12009Q 12010Q 12011Q 12012Q 12013Q 12014Q 12015Q 1 MillionsEmployed Source: Bureau of Labor Statistics, Moody’s Analytics Divided Government Doesn’t Matter Change in Total Federal Outlays 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 YearoverYearChange Republican Controlled House Democrat Controlled House Reagan Bush I Bush IIClinton Obama Shaded Bar = Opposite Party President0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 YearoverYearChange Republican Controlled House Democrat Controlled House Reagan Bush I Bush IIClinton Obama Shaded Bar = Opposite Party President Sources: Government Printing Office (GPO), Cassidy Turley

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