Could There Be a Silver Lining in All of the Economic Gloom?

By Stan Laegreid, Principal

The last few months have been challenging and cryptic to read on the economic front, and even more confusing to interpret for the architecture and commercial real estate industries.

After numerous discussions with developers, retailers, economists and journalists at various conferences around the world, I have heard many viewpoints and perceptions that counter the prescriptive frenzy that the sky is falling. In taking a step back and absorbing the information, I have gleaned some hope there might be a light at the end of the economic tunnel.

To put this recession in some kind of context, ponder this: our current unemployment rate is 6.8 percent, while during the 1930’s Depression, unemployment was more than 25 percent. In fact, until October 2008 our recession was ranked in the top three mildest since 1900. The October-November figures, based on unemployment and consecutive months of negative GDP, have put this recession in the middle of our historical recessions. Most economists agree that we have been in a recession for six to nine months already. Since the average recession over the past century has lasted about 18 months, we may be close to halfway though this one.

One strand of prevailing wisdom holds that the administration of President-Elect Barack Obama will benefit from the shaky current situation. Its charge will be to stop further hemorrhaging and provide stability. That means the Dow Jones Industrial Average trading in a narrower range and a reduction in large-scale layoffs over the next six months. If that can happen there are actually large reserves of money ready to make a move. Investors who got out of the stock market at its height are sitting on gains, and most are waiting for the market to settle down so they can re-enter at the bottom. This is very similar to the 2001 recession. As the dust settled, much money found its way back to real estate development in the form of REIT investments. In difficult times, investors turn to real estate. To quote Will Rogers, “Buy land, God isn’t making any more of it.”

A case in point is the deathwatch on the General Growth REIT, owner of Westlake Center and the Alderwood Mall. It is over-leveraged and suffering. But the General Growth REIT has a strong portfolio of assets. Key players like Westfield Holdings and Simon Property Group are reported to be waiting in the wings. They do not want to see General Growth go under since that would effectively drag the appraised value of all shopping center properties down and reduce shopping center REIT values.

The other factor in the 2001 recession was that after 9-11, much of the Middle East and Gulf money stayed in the region, which has played a large role in the instant growth in that area since then. Large amounts of money that had been pouring into the U.S. and Europe stayed home to fuel a Mideast development frenzy. That was a benefit to firms like Callison, which saw an increase of work in the region. But it has contributed to the over-saturation of the market. The Gulf invested $1.7 trillion in the U.S. and Europe since 2001 and according to The Financial Times, that is projected to double in the next four years, which can only have a stimulus effect.

The price of oil is currently in a very good position for the American consumer at about $40 a barrel, but that is considered the general break-even point for many of the Gulf investment business models. However, Saudi Arabia can make a profit at $5 a barrel and can last 90 years on its existing reserves. Despite that, as the dominant player they would like to see the price around $70 a barrel — and they no doubt will be applying pressure to get it back there. Saudi Arabia is looking at the long run and will likely be patient.

But we are at the tipping point where OPEC gets nervous and other countries (Dubai, Bahrain, Iran) with much shorter reserves are anxious to see their dwindling reserves commanding higher prices. This has had some direct effects on the current workload shifts in that region and it would be wise to concentrate on the markets with deep reserves that are still moving ahead: Abu Dhabi, Qatar and Saudi Arabia.

In summary, the mantra that I have consistently heard from our international clients is that they plan on laying low for 6 to 12 months and then if things settle down they are in a position to move ahead aggressively again. Let’s hope that is true.

Stan Laegreid is a principal at Callison, an architecture firm, in Seattle. He is a noted leader in retail trends with more than 25 years of international experience and specialized work with retail developers.