US heads into another real estate mess

Walk the streets of midtown Manhattan, listen to the jackhammers, look at the cranes on so many blocks and you might conclude: these people are in the midst

US mortgage crisis: A subprimer
of a big commercial real estate boom.

You might be right, but not for long.

Non-residential property investment in the United States, which usually tracks economic growth with a delay, has stayed unusually strong unusually long into what is looking like an increasingly ugly and protracted recession.

And that is pretty bad news, both for the economy and the banks. The economy is about to suffer the latest dropping of other shoes when non-residential construction, which includes everything from hotels to office buildings to manufacturing plants, turns sharply south and removes one of its few supports.

There simply won't be enough demand for all of these new office buildings, malls and hotels, even in places that aren't banking centres. And manufacturing and power construction, which have been very strong, may be hit by dropping demand, both at home and overseas, as a global downturn takes hold.

Development will slow or contract, jobs will be lost and economic activity diminish.

And the banks themselves, which are already such basket cases they require government support, are about to see the value of the commercial real estate loans they own get whacked, prompting yet another self-reinforcing cycle of loan writedowns, tightening credit and loss of confidence. "It takes a lot of time until projects are finished and there were a lot of things in the pipeline. But developers are probably not very happy about it," said Harm Bandholz, an economist at Unicredit in New York.

Because it takes time to plan, finance and build a building, it is not unusual for development to carry on after gross domestic product growth begins to weaken, but this time it has defied gravity. "Usually you have a tight correlation between GDP and construction, with a lag of two quarters. This is unprecedented," he said.

Private investment in structures grew by 14.3 per cent in the second quarter as compared with the quarter before and though it is a fairly small sector actually contributed almost a half a percentage point to GDP growth.

The growth was concentrated in the manufacturing, power, lodging and office sectors, all of which face considerable headwinds now. Manufacturing is sensitive to domestic and global growth, which is falling. Power plants may be less profitable with oil now in double rather than triple digits. Hotels would seem to be a natural to lose out during a recession, and offices need businesses and workers, of which there will be fewer.

Source: EconomicTimes