By Al Barbarino
A man with a heavily scarred and burned face, forming a slight, sinister smile and holding up a set of long, sharp, clawed fingers, gazed from under a brown fedora hat upon a room full of unsuspecting real estate professionals.
Freddy Krueger, the fictional character from the film A Nightmare on Elm Street wasn’t recalled from the dead to attend the Urban Land Institute’s 2012 Real Estate Capital Markets Conference last week (Wednesday).
His image was projected onto two large screens during a presentation by Jacques Gordon, global strategist with LaSalle Investment Management in Chicago, IL, as the economist laid out his roadmap – and nightmares – for the future.
“My biggest nightmare is this,” Gordon said, revealing the next slide in his presentation, depicting U.S. 10-year Treasury Bond rates, which reached an all-time low of 1.44 percent in June and currently are wading around 1.6 percent. “This is something to worry about big time, because when it goes up it will destroy value.”
The 10-year yields are at 50-year lows, having steadily declined from upwards of 9 percent in the early 1990’s. Trouble in foreign economies, particularly in Europe, has pushed international demand for U.S. bonds to all-time highs, as investors continue look to the U.S. as a safe haven from the horrors abroad.
When the rates go up, since they have no other direction to go, the U.S. economy will hopefully be doing well, Gordon said. But as the situation in Europe settles down, no one, including the Chinese, will be “rushing to the safety of U.S. Treasuries,” raising the cost of U.S. capital.
“We have an artificially low cost of capital today on the debt side,” Gordon said. “That’s the thing to be aware of and to be worried about.”
For now, the bigger problem is perhaps the effects that Europe’s continued distress is having on the global economy, as countries like Greece and Spain inch closer and closer to death.
Though the focus of the ULI conference wasn’t Europe, it seemed difficult for speakers to avoid the subject, as the situation drags the U.S. and global economies down, said Stephen J. Furnary, CEO of Clarion Partners, who co-chaired the conference and provided opening remarks to Gordon’s presentation.
He spoke to the challenges that lie ahead for the United States, touching on the “dichotomy” that exists between the general economy and one of the brighter spots within it – the real estate market.
“We still have to reduce debt, we have to deleverage and we have to stimulate growth, and that’s an extremely challenging thing to do,” Furnary said.
“On the other hand the real estate market is actually improving… I think it has improved nicely and I think it’s going to improve nicely,” he added, citing strength in net-operating income, rent and value growths, as well as an abundance of capital.
Before Gordon called upon a disfigured, fictional dream stalker to send waves of horror through the room, he conjured up the comparatively benign image of a Greek waiter, swaying through a restaurant while balancing a tray effortlessly.
“Are we keeping our balance?” he asked. “It’s still very tippy out there,” he answered.
But like Mr. Furnary, Gordon pointed to the relative strength of real estate, which is helping investors to keep their balance.
At $54 billion, projected transaction volume for Q4 is $8 billion above the 10-year average. And the NAREIT index, at 13 percent, continues to outperform other major asset classes and indexes. Volume isn’t “quite as frothy” as it was in 2005 through 2007, but it’s healthy.
“We can feel pretty good about real estate’s contribution in an investment portfolio,” he said. “My prediction is we’re going to continue to see decent deal flow here in the U.S.”
Gordon encouraged out-of-towners to break away from their hotel rooms to explore the “laboratory” that is New York City real estate – to visit the High Line, Chelsea, SoHo and some of the developments going on in Brooklyn.
“It’s amazing,” he said. “All this stuff is tried out here, some of which works, some of which doesn’t.”
