My Crystal Ball Forecast for 2013

Forecasting reminds me of the quote attributed to one of our most famous philosophers of the 21^st century, Yogi Berra.  He said, “It’s tough to make predictions, especially about the future.”  But it’s that time of year when we all want to know what the new year is going to bring.  Specifically those of us in commercial real estate want to know, “How is commercial real estate going to do in the Pacific Northwest in 2013?” 

Well you’ve come to the right place because I’m bullish about the immediate future of commercial real estate.  Interest rates should remain low throughout 2013.  Commercial real estate should continue its upward trend out of our plunge into the abyss caused by the Great Recession of 2008.  Four years ago we were in a free fall, similar to a skydiver who waits as long as possible before he pulls the ripcord that opens his parachute.  It looked bleak.  Let me correct myself.  It was bleak.  But in 2010 we bottomed out and 2011 showed a modest improvement.  Last year was even better and there is no reason to believe this trend won’t continue into 2013.  

However there are three caveats to this prediction.  As James Carville once said, “It’s the economy stupid.”  And sure enough how well we do in 2013 assumes that the economy continues to grow at the modest pace that it has grown for the past few years.  If not, then all bets are off.  There are three things that could derail our economy. 

1.  The Slow Down of the World Economy 

Even though 70% of our economy is derived from domestic spending, the United States is not immune to what happens in the rest of the world.   And what is happening in the rest of the world?  Europe is in recession and the economies of other countries are slowing down.   This means that there will be less demand for our exports, which means our economy will begin to feel the affect.  However, I don’t believe that during 2013 we will feel the brunt of this slowdown to any real degree.   If the slowdown continues into 2014 and beyond then it is likely that it will slow our economy, maybe throwing us into recession as well but not this coming year.  

2.  Europe Muddles Through 

As I’ve discussed on several occasions, Europe’s sovereign debt crisis is not going to end well.  There is no satisfactory solution to their problem.  The only question is when, not if, it will implode.  The Europeans have been doing an excellent job kicking the can down the road these past few years and I’m guessing they will be able to further kick the can down the road through 2013.  If they can there will be little negative consequence this coming year to their sovereign debt crisis on the American economy. 

3.  Fiscal Cliff Outcome 

As of the time of my writing this blog post the Senate has just passed a bill to avoid the fiscal cliff but it has yet to be voted on by the House.  It’s hard to tell if this version will be acceptable to House Republicans.   At some point there will be an agreement, either this bill or one modified slightly to accommodate the House Republicans.  But let me let you in on a little secret, actually a big secret: It makes no difference which side wins the budget negotiation.  What both sides are proposing is equivalent to arranging the deck chairs on the Titanic.  They are haggling over nuance differences over how to raise tax revenues with almost no proposed spending cuts.  The proposed bill will raise about $1 trillion over 10 years.  That’s equal to $100 billion annually, which is an insignificant amount when compared to what is needed to right our fiscal ship.  So instead of having annual deficits of $1.2 trillion, we will have going forward $1.1 trillion in annual deficits.  So in ten years the total U.S. debt will go from $16 trillion to $27 trillion.  Sadly, no one in Washington has the courage to put our fiscal house in order.  Not the president, not the Republicans.  

Now the real question for 2013 is whether or not the stock market and the credit agencies perceive this miserable attempt at political theatrics as the sham that it is.  If not, then it will have no adverse impact on our economy.   If they do, the stock market will start to decline, possibly precipitously, and the credit agencies, such as Standard & Poors, may be forced to further downgrade the credit rating of our country.  That’s the potential fallout from the Fiscal Cliff.   Stay tuned.

If we can avoid these three pitfalls from happening in 2013, then our economy should continue to grow.  And with a growing economy commercial real estate in the Pacific Northwest should do quite well this coming year.   But the bigger issue is finding people on both sides of the aisle who have the political courage to get us out of our fiscal mess.