When Europe Sneezes, Will We Catch A Cold Again ?

 credit to M. Heschmeyer ( Co-Star)
A handful of global economic and CRE outlooks this week tie the fate of the U.S. and European Union markets uneasily together. While the United States real estate market seems comparatively healthy at the moment, economists are concerned that, in an increasingly global and international market, the lingering European financial crisis is dampening a recovery in the U.S.”The global economy seems to take two steps forward followed by one or two steps back, and it mostly has to do with Europe,” said Ira Kalish, director of global economic at Deloitte Research in the United States in the company’s Global Economic Outlook. “Each time the Eurozone starts to seem more stable, the crisis rears its ugly head again. The result is downward movement of European economic activity and increased uncertainty. Both of these factors, in turn, have a negative impact on growth everywhere else.”

Even U.S. Treasury Secretary Timothy Geithner is urging his European counterparts to be more forceful and creative in fighting the debt crisis and keep it from dragging down the global economy. Geithner said it will take “a long time” for broader economic and financial reforms to work, but for now “They have to be more forceful and more creative and more effective in calming the financial pressures that are doing so much damage to growth,” Geithner told the Los Angeles World Affairs Council.

Dr. Carl Steidtmann, chief economist at Deloitte Research, was more specific, identifying a series of structural problems he sees holding back economic recovery.

“While Europe is grabbing a lion’s share of the economic headlines, it is not the only problem beguiling the U.S. economy,” Steidtmann said. “A wide range of structural problems pose a continuing threat to growth. In the best of times, these problems would simply limit the pace of growth. In difficult economic times, they make the economy more vulnerable to recession.”

These structural challenges Steidtmann sees include:

    • The contagion effects from a European meltdown;
    • A deepening of the liquidity trap that makes the Federal Reserve’s task of managing monetary policy more difficult;
    • Structural problems in the labor market due to a mismatch between the job skills, location of the unemployment, and the available job openings;
    • A sharp reduction in the pace of new business formation; and
  • Private sector debt reduction that still has a long way to go.

The European economy moved into a recession in the second quarter of 2012. For the Eurozone as a whole, real growth fell 0.1% in the first quarter of 2012 from a year ago, Steidtmann contends.

“The financial crisis of 2008 started in the United States and spread to Europe. In 2012, Europe is returning the favor. Since the creation of the euro, the U.S. and the Eurozone economies have been economically joined at the hip,” Steidtmann said. “The hopes that the U.S. economy can somehow decouple from Europe is not supported by the data. The correlation between U.S. and Eurozone economic growth over the past decade has been a very high 89%.”

“Europe’s recession will be transmitted to the United States through trade, European investment in the United States, banking, and the performance of U.S. companies with material European operations,” he said.

Jones Lang LaSalle’s in its third quarter Global Market Perspective acknowledges the global storm clouds gathering again as Euro strains re-emerge.

“After a promising start to 2012, prospects have become gloomier across the global economy. Once again it is problems in the developed world that are causing concern, JLL noted in its report. “The main trigger for this has been the deterioration in the Eurozone situation, as a series of elections have undermined the political commitment to austerity and rekindled market fears.”

“The recent news from the United States has been disappointing, with consumer and labor market indicators failing to maintain an encouraging start to the year. U.S. output forecasts have been edged lower as a result and below-trend GDP growth at 2.0% is now forecast, slower than in 2011,” JLL researchers in London noted. “Europe’s sovereign debt crisis continues to present the gravest risks to the global outlook.”

Both sentiment and levels of activity across the world’s major commercial real estatemarkets have seesawed during the first half of the year, JLL noted.

“Deals are taking longer to close and the market remains polarized as investors steer clear of risky assets, focusing instead on prime product in core markets like London, Paris and New York,” the firm said.

“Yet, in spite of economic uncertainties,” JLL continued, “real estate as an asset class continues to attract a substantial weight of capital and remains firmly on track for this year’s global investment volumes to match the robust levels of 2011.”

In the corporate occupier markets, leasing volumes are also up on the subdued levels of the first quarter, but activity is still running 10%-15% lower than in 2011. Expansion demand is relatively weak as corporate occupiers look for further cost savings and smart growth ‘in situ’.

Dr. Raymond Torto, CBRE Global’s chief economist, sees much of the same in CBRE Global Office Rent and Global Capital Value Indices out this past week.

“Rental rates and capital value improvements have slowed dramatically following considerable recoveries during 2011,” Torto said. “However, despite the economic uncertainty, this quarter provided evidence, that while both occupiers and investors remain highly cost conscious, they are also forging ahead with expansions or investments in prime spaces. This dynamic has helped to bolster rental rates and capital values ever-so-slightly, and particularly in the U.S. market.”

The relative strength of the Americas (posting a 1.5% quarterly growth) has driven the Global Capital Value index upward at a modest rate, CBRE noted. However, the global growth rate has been weakened by the EMEA Capital Value Index.


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