SPECIAL REPORT: Economist Diane Swonk Looks at Real Estate in 2006
In an exclusive interview with CPN, Diane Swonk (pictured), Mesirow Financial's chief economist & senior managing director, predicted that 2006 would be the year "when the shocks that hit the economy this year--everything from oil prices to hurricanes to a rise in interest rates--come home to roost." She isn't predicting disaster; just that into the new year the reverberations of these shocks will be felt across different sectors of the economy, including commercial real estate.
On a macroeconomic level, there will be a further upward creep in interest rates, she noted, and a steepening of the yield curve in 2006. "But those increases will be limited because the rest of the world is slowing down relative to the United States," she said. "So we still look better than everyone else, even with all our warts, and investors will still put money here. Also, the federal budget deficits for fiscal 2005 and 2006 are going to look better than expected, because tax revenues continue to surprise on the upside."
Closer to the ground, Hurricane Katrina's lingering impact is bound to be felt. "How the rebuilding of the Gulf Coast plays out will be a very important issue to commercial real estate," Swonk said, even beyond the money, materials and labor allocated to the effort. "We know that the office vacancies in places like Baton Rouge and Houston and even Atlanta have plummeted because of relocations. But we don't know how fast people will return to offices in New Orleans, for example. That's good for those other cities in the short run, but the real worry is that developers will build like crazy in those areas."
In fact, Swonk said that overbuilding is a danger in other office markets as well. "The risk is that, like in Chicago, there will be other markets across the country in which too much space is coming on line," with development spurred by a frothy investment market.
In the industrial real estate realm, Swonk said she sees exports slowing somewhat because of energy prices, though imports will be relatively robust. "The good news is that we have a non-auto manufacturing recovery here in the Midwest, and across the country," she said. "There will also be a push to invest in energy-saving technologies, and that will help the industrial sector as well."
In the retail sector, she noted a widening dichotomy in consumer spending patterns, with 91 percent of households in the country earning only half the total income, with the other 9 percent taking in the rest. The result has been a hollowing out of the retail sector, with the luxury and discount segments doing very well, while the middle wilts. "The downside," she noted, "is the downsizing of department stores will continue, with more retail space coming on the market in the form of former department stores."
