The Raub Report July 2010 Commercial Real Estate Newsletter for San Antonio
July 23, 2010
“Uncertainty” is our word for the day. It applies to predictions of future events and the unknown. Uncertainty is distinctly different from the familiar term “risk” which is a measurable uncertainty. Uncertainty is immeasurable.
Risk, in the financial arena, is quantifiable. It is incorporated into interest rates, discount rates, insurance premiums, capitalization rates and the like. It is our effort to reduce the unknowable into probabilities and put a number on it. Uncertainty is a different beast entirely, one that eludes the cage of numbers and wonders the forest trying to eat us and our assumptions about the way things should be.
In the U.S. of A., we have been stalked relentlessly the past three years by this beast of Uncertainty. If the Best and Biggest Banks can fail, what business couldn’t fail, too? If our 4% unemployment rate can climb to 10%, whose job is secure? If the U.S. housing market — the safest and surest asset class ever, never having a nationwide, annual decline since the Great Depression — suddenly and unexpectedly falls apart, what investment is safe? If the stock market can fall 1,000 points in a “flash,” why risk it? If money market fund yields are near zero, what’s the use? If the Bush tax cuts are not extended, what will be the new tax policy? These are more than risks because we can not contain or cage them with analysis. This is Uncertainty — risk that cannot be quantified.
Mark Dotzour, Real Estate Center Chief Economist, said recently, “So why aren’t [corporations] hiring people? The answer is uncertainty: uncertainty of capital gains and income tax rates; uncertainty about the cost of health care and the possible increase in energy costs due to ‘cap and trade.’ The prospect of new and increased government regulation makes it hard for businesses to see clearly into the future.” Dotzour points out that businesses can buy insurance against risk, but there is only one way to “insure” against uncertainty and that is to hoard cash. “There is now nearly $3 trillion sitting in cash on business balance sheets,” he said. “They have much more capital than the Federal Reserve, the FDIC, Fannie Mae, and Freddie Mac combined.”
Businesses have postponed decisions for three years. No point to hire when that could put your business under. Let’s wait, so the unemployment rate remains high.
I believe the tipping point back to growth will be the November elections which will rebalance the parties. Gridlock will likely be the result which will put Uncertainty back in its cage. We may not like the New Reality but at least businesses will have some certainty over what the new rules will be. New plans can be implemented and hiring will resume.
In San Antonio, residential construction is moving forward at a slow but consistent pace. Multifamily construction will restart. Office buildings have seen an increase of 480,000 SF in occupancies this year. Retail is still suffering; industrial leasing is flat. There is no speculative construction. Banks are eager to make very conservative loans to wealthy and high earning businesses and individuals. It will be a long recovery.
At IRC, we believe that trust and confidence are the best defense to Uncertainty. We work hard every day to earn your trust and confidence in our skills to help you with your commercial real estate needs.