Panic, Fear Keeping Activity at a Standstill

NAI Global Chief Economist Dr. Peter Linneman Shares Economic Outlook

The global economy today is gripped by a minefield mentality and a crisis of confidence that is resulting in extreme stagnation, according to NAI Global Chief Economist Dr. Peter Linneman. “It’s like we walking along in a field on a beautiful fall day, and suddenly saw someone blow up. Somebody yelled ’Minefield!’ Everyone would immediately stand still, stare at their feet and start sweating,” said Linneman, describing how the economy got to this point during NAI Global’s recent quarterly Global Economic Outlook web conference.

In reality, the financial markets blew up, lenders stopped lending, investors stopped buying, businesses stopped expanding and consumers stopped buying, bringing an already slowing global economy to a screeching halt. Dr. Linneman calls this “the Great Capital Strike” and noted the role of Washington, DC, which has become pre-eminent, “even with a decade-long lack of political leadership from the administration and Congress,” he said. “Basic trust has been lost, and that lack of trust has played an enormous role in the events of the past three to four weeks. Everywhere you go is stagnation, because we are looking at our feet instead of moving forward. Panic is never good, particularly when fueled by a government playing by a playbook we don’t understand.”

Dr. Linneman provided perspective on how the economy declined to the lowest level in years, an examination on what is impacting the market today and forecast of what to expect in the coming 18 months. Highlights from the web conference include:

• Per capita income will decline in 2009 as few are investing, taking on new opportunities, expanding their product offerings or doing transactions;

• Employment will decline; less because companies are letting a lot of people go, but anybody who dies, retires, has a child, gets ill, goes back to school – those jobs aren’t being replaced;

• Expect another 1 million lost jobs in the coming six months, 1-2% drop in absolute GDP, and a slight acceleration in retail store closings;

• Retail will skew to the non-durable goods sector, non-capital intensive sector and the lower end of the price point;

• Hospitality demand, which has held up until now, will see advance bookings drop;

• The office sector will see a halt in new leasing activity amid a great deal of uncertainty. Instead of a lot of empty space, we will see a lot of shadow space (leased, but not occupied, space) build up;

• Vacancy, though on the rise, will occur more at the desk level, slowing recovery as companies need to fill existing space before expanding to new;

• Good news: the commercial real estate pipeline has been muted, with about 1-2% new product coming online. That, combined with few construction starts, will keep vacancy rates down.

In addition to serving as NAI Global’s chief economist, Dr. Linneman is the Albert B. Sussman Professor of Real Estate, Finance and Public Policy at the Wharton School of Business, University of Pennsylvania, and Principal, Linneman Associates.

The entire Global Economic Outlook web conference is available On Demand at www.naiglobal.com.

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