The Stimulus from a Realestatarian’s Perspective

Your perspective on the relative success or failure thus far of the American Recovery and Reinvestment Act of 2009 aka “The Stimulus Plan”, probably depends, in part, on your political persuasion. Republicans have called it a failure and Democrats remain hopeful that the benefits will start to tangibly kick in. I would like to look at the $787 billion  (which equates to about 5.5% of GDP while the New Deal was only about 2% of GDP) the government has appropriated from the perspective of neither a Republican nor a Democrat, but rather from the perspective of a real estate guy or what I will call a Realestatarian.

In February, we were told that the Stimulus plan had to be approved by Congress “to avoid economic armageddon” because “we are approaching a financial catastrophe unlike anything this country has seen since the depression.” The President told us that, “A new wave of innovation, activity and construction will be unleashed all across America” and that it would, “create up to 4 million new jobs” (“create or save” was the modification months later when it was clear that the projection was a fantasy). The Vice-President said that the spending plan would “drop kick” the economy out of the recession. The National Economic Director said, “You’ll see the effects begin almost immediately”.

These statements sounded very positive. The Realestatarian in me told me that it sounded too good to be true. When has the government, under any party, efficiently implemented a program like this? And by the way, How were we going to pay for this spending plan?

Another major concern has been the unprecedented shift in economic power from the private sector to Washington D.C.  Moreover, notwithstanding the party affiliation of the resident in the White House, programs like this have typically been riddled with waste, fraud, abuse, inefficiency, incompetency and corruption. With a unified government the potential for these outcomes is unavoidable.

From the Realestatarian’s perspective, what matters most? JOBS, that’s what. Employment is the single most important indicator affecting the fundamentals of our real estate markets. If people are out of work they are not spending money and if people are not spending, our retail tenants are not leasing new stores, let alone paying the rent on their present locations ( 70% of GDP is the result of consumer spending ). If people are not working they are not likely to be moving to a bigger apartment, or moving from a rental unit into a newly purchased home. If companies are reducing the size of their workforce, they don’t need to lease more office space and may even be disposing of excess space caused by contraction. We need jobs to stimulate growth and the Stimulus Plan has not produced new ones. Whether jobs have been saved is difficult to prove, hence a wonderful political thesis.

Today, the Bureau of Labor Statistics tells us that the unemployment rate is 9.5%. This is, however, just the tip of the iceberg. This is based upon a June number of 467,000 jobs lost. These numbers are typically revised and the revisions rarely are downward. 7.2 million people have lost jobs since the start of the recession wiping out the total net gains of the prior nine years making this the only recession since the Depression during which all of the job growth from the previous expansion has evaporated.

Additionally, the unemployment rate does not take into consideration all of the people who have given up looking for a job or workers taking part time jobs who would would like to work full time or workers who have been asked to take unpaid leave. If these groups were included, the unemployment rate reaches 16.5% leaving about 25 million people involuntarily idle. Projections from most economists now indicate that unemployment will peak between 10% and 11% and rates over 9% are likely to be with us throughout 2010. To say this is not good for real estate is an understatement.

The Stimulus Plan was supposed to yield $1.50 of economic activity for every dollar spent. Thus far, less than 20% of the money has actually been spent and the benefits have been difficult to see. Unfortunately, the Stimulus Plan is loaded with pork and too much of the money has gone towards tranfer payments such as Medicaid and unemployment benefits, neither of which do anything to create jobs or stimulate economic growth. Jobs would be created by spending on  infrastructure but only about 10% of the $787 billion is slated for this purpose.

Benefits to small businesses would stimulate job growth and are needed. Small business entrepreneurs have led America out of the last seven post-World War II recessions. They also create about 2 of every 3 new jobs during a recovery. Rather than providing tax savings to these businesses (which can be implemented quickly and efficiently), all indications are that small businesses will face rapidly increasing taxes whether it is because of a need to pay for a government run healthcare system, a need to plug budget gaps created by all of the spending the government has initiated or simply because inevitable inflation (caused by a doubling of the money supply in just 9 months) will increase the cost of borrowing. This is a major concern as the money supply has grown by more in the last 9 months than in the last 50 years in aggregate.

Unfortunately, the economic downturn has been used as an excuse to greatly expand the size of government. The Stimulus, and how the money has been allocated, clearly reveals that, presently, income redistribution is prized above all else, including job creation and economic growth. As Realestatarians, we can’t be feeling too good right now. We need to see a reversal in the direction of unemployment before a real estate recovery can occur.

17 Responses to “The Stimulus from a Realestatarian’s Perspective”

  1. 1 Carl Todd July 21, 2009 at 10:58 am

    You hit the nail on the head! An informative recent book on the subject that all in our business should read is William Greider’s “Come Home America”.

    In my 62 years in the RE field its not location, location, location as the base but demographics, demographics, demographics within the trading area that distinguishes one location from another. The one axiom that governs the commercial sector was expressed by FDR, namely, there can be no prosperity until the man (today’s correction – person) in the streets has money in their pocket. The more people with more money in their pockets in a given area the better the location.

    Unless the stork dropped you down the right chimney the only way you can get money in your pocket is via work and for most work equals jobs. Not offshore jobs but made in America jobs.

    Do I detect a rival organization in the making to “Realtor” which is brokers and your “Realestatian” infers that is all encompassing from appraisers to superintendents and everything field in between.

  2. 2 rknakal July 21, 2009 at 11:07 am

    Hi Carl, Thank you for your post. I have to pick up that book! Your observation about demographics is right on point. We need job creation as soon as possible and that will happen with initiatives other than the Stimulus. And yes, Realestatarian cosists of anyone who has an interest in the functioning of the real estate market.

  3. 3 John Arnold July 22, 2009 at 1:22 pm

    Mr. Knakal – You point out the gov stimuli should be focused on job creation, which will help all facets of the commerial real estate industry.

    But, and purely in the selfish brokerage interests of seeing a pick-up of activity, do you see potential gov provided mortgage guarantees or similae programs as significantly reducing the number of distressed asset sales and the golden commission opportunities from which they stem?

  4. 4 Carl Todd July 22, 2009 at 1:41 pm

    Soon after is started my RE career I was heavily involved in retail renting, site selection and associated development and management of retail properties.

    In those yearly years a local chain store owner took me to a series of lectures on retail site location and rent determination sponsored National Cash Register. In those years the RE Bd. as the Urban Land Inst. does today published percentage rents paid for various types of retail business. This meant if one were to determine an economic rent for a particular retail business one first had to determine the potential gross sales of the business at the subject site. Well that lead to three vital steps, namely determining the trading area of the subject, the existing competition and potential (undeveloped suitably zoned sites), and the trading area’s sales potential for you tenant’s line of business. The latter lead directly to a demographic study. All involved in site selection work are familiar know the how to do those studies.

    After the obvious easy work was done and the first blush money made usually directly by the owner/builder what was left for the rental broker was a goodly supply of newly constructed vacant stores. To rent those store the sharp broker had to find the non-obvious user. This meant a deeper refined study basically looking at the demographic trends within the trading area.

    A very good book that gives the reader an insight into what to start looking for is Mark Penn’s “Micro Trends”.

    A valuable source of information about an area’s buying habits and are the salesmen who supply the retailers. They know what’s now hot and what was once hot. They also know retailers who are in the immediate market for a change in location or an addition store. In the past I’ve rented many a store by referrals from product and store fixture salesmen.

    As Dad always said: ” Its not land, bricks and mortar stupid, it about people, people, people.”

  5. 5 JWB July 24, 2009 at 7:31 am

    Sounds like a great idea for a new party. I’ll vote for you.

    The only problem is that you have had a real job and that might make you inelligble to be a politician…

  6. 6 Steve July 24, 2009 at 10:47 am

    It’s too bad the you misunderstand the economics behind the ARRA. As one of your respondents notes, the plan is to put money in the pockets of the average person who will then spend the money on the everyday goods and services that he or she needs to survive. In the process, the increase in demand will cause an increase in employment as producers seek to provide the goods and services requested.

    The major problem with this an any other recession is liquidity. When demand falls, goods and services become illiquid and unemployment follows. The only way to increase demand is to provide demand side incentives through fiscal mechanisms like the provision of unemployment compensation. Increases in Medicaid payments help to keep workers, especially those in the lowest income strata, healthier and therefore more able to work. In turn, that means lower unrecovered costs to the healthcare system and lower health care premiums. Lower healthcare premiums also mean lower operating costs.

    Supply side incentives, as you suggest should be given to small business, would not necessarily mean an increase in employment. It is not likely any business would add to their inventories or to their employment roles when demand for their goods or services is slack. Instead, it would make far more sense to hold in abeyance whatever incentive the business might receive until it becomes obvious that the recession is ending. Only then would the incentive be used.

    So often we hear in the popular press that consumer spending makes up roughly 2/3rds of the economy. If consumer spending decreases due to a recession, it makes sense to apply incentives to that part of the economy first. With the incentives they receive, people will buy what they want and that will recharge the economy.

    In a recession, we should incur deficits and increase transfer payments as a way to help stimulate demand for the goods and services producers provide. During recovery, we should incur surpluses to pay off the debt we incurred during the recession and to build reserves for the next recession. This is a very simple concept that has been lost on many business people and certainly was lost on the prior adminstration. The deficit you should be concerned about is that incurred in 2001-2008 as that is what makes our fiscal situation as perilous as it is today.

    My recommendation to you and to many in the business world is to review the principles of economics first identified by John Maynard Keynes. If you would do that, I believe that you would discover that Realestatarians have more to fear from the position you espouse than you do from the ARRA.

  7. 7 rknakal July 24, 2009 at 4:47 pm

    Hi Steve, thank you for your post. I respect your opinion but have to disagree with you. A one time or limited term payment(s)from the government are spent very differenly than wages from a good job. The majority of a limited payment is saved or used to pay down debt. Wages from a steady job are more stimulative to the economy. I find it interesting that you indicate that I am worried about the deficit. The word deficit does not exist in my piece. And yes, I was extremely upset that the Bush administration, under which GDP grew by 15% and government spending grew by 59% spent like cowboys. As for the current stimulus, there is stimulative spending and there is less-stimulative spending. The intent was to create jobs. I am not commenting on the social benefit to those receiving these funds. These payments, most economists agree, are not as stimulative as money spent on infrastructure. Tax benefits also are stimulative and create jobs. I also disagree that companies will not hire people before demand gets back to normal levels. Proactive companies hire in anticipation of the upswing so as to take full advantage of the cycle. Margins are stressed today and if taxes go up, jobs are cut. If my taxes were cut, I would take the tax savings and use it, dollar for dollar, to bring on new employees. Those new jobs, and the wages paid to the employees, would stimulate the economy. Again, I respect your opinion but we will simply have to agree to disagree.

  8. 8 Carl Todd July 24, 2009 at 4:49 pm


    In engineering school we were taught that there is no such thing as a complicated machine. To understand the machine being studied and analyzed you must keep braking it down until you find two gears rubbing against each other and build from there.

    You can not solve and understand a problem by examining the the surface only or what appears to be obvious on a partial break-down. To be sure you have solved the problem and designed an effective remedy you must find the two gears rubbing against each other and go from their.

    When I first started to begin to get five figure fee cases I had one that had me stumped. I finally called one of my mentors who said he had little TIME and told me that I knew the three fundamentals that controlled the subject property and that I most likely misses a basic principle in one of them. Upon a re-examination of the research, keeping that advise in mind, it hit me in the face in one of the fundamental concepts. A bit more research completed the missing link (the two gear example) and the whole case fell in line to my satisfaction and my client’s hearty approve.


  9. 9 rknakal July 24, 2009 at 4:56 pm

    JWB, Thanks for the post. You made me laugh.

  10. 10 rknakal July 24, 2009 at 5:02 pm

    Hi Carl, thanks for your post. Sounds like your dad gave you some very wise advice. Thanks for sharing that.

  11. 11 rknakal July 24, 2009 at 5:10 pm

    Hi John, thank you for your post. When it comes to government guarantees of commercial mortgages, there are too many questions which would need to be answered before an opinion could be formed. The fact is that a significant percentage of properties purchased in 2005-2007 presently have negative equity levels. Some of those borrowers will stop making mortgage payments and the properties will be recycled. There will be plenty of commission opportunities coming up from the distressed sector over the next couple of years.

  12. 12 Carl Todd July 24, 2009 at 5:26 pm

    How does the old saying go – “never asked the people who created the problem to find the solution to it” – enough said guys.

  13. 13 Carl Todd July 25, 2009 at 9:47 pm

    FYI on demographics in real estate – The Urban Land Inst. just published a book on the subject: “Global Demographic Trends & Their real Estate Implications” Their fall Nov. 3-6 meeting and expo. in San Fransisco will be featuring demographic. For more on the book and meeting go to http://WWW.ULI.ORG.

    Unfortunately I will not be able to attend for two reasons, Sloan-Kettering has my cancer in remission and my immune system should not be exposed to a new environment for a while longer and I have an adjourned case that we be tried then that requires my expert testimony. If they make tapes or DVDs of the meeting I’ most likely buy them with the book and any class material that can also be purchased on the topic.

  14. 14 rknakal July 26, 2009 at 7:00 pm

    Hi Carl, I am glad to hear your cancer is in remission and will say a prayer for you. Keep up the good fight. Bob

  15. 15 bws July 29, 2009 at 9:32 am

    Mr. Knakal,

    Of all the latest information, analysis and speculaton in the NYC and national commercial and residential real estate marketplace, it humbles me to have access via the internet to such an impressive veteran business mind attempting to make some sense of the current market conditions and inherent issues.

    Had I not been at Esther Muller’s course in the NYAC (when you were a guest speaker) a few years ago, I cetainly feel I would not have had the access to such impressive and concise insights regarding the latest state of affairs within our industry.

    Thanks for taking the time to anaylize the data, create dialogue and offer your infinite wisdom with members of our industry. In my opinion… 25 years in this business is equvalent to a life time in any other industry!

    Bruce W. Solomon

  16. 16 rknakal July 29, 2009 at 10:15 pm

    Hi Bruce, thank you for your post. Your comments are very kind and I sincerely appreciate them. Best of luck to you in your endeavors.

  17. 17 TommyD August 4, 2009 at 10:50 am

    Response to Steve:

    The simple truth is that John Maynard Keynes is not infallible and, in fact, most evidence strongly indicates that his Keynesian fiscal policy does not work. As Milton Friedman points out, the problem with fiscal policy is that the money has to come from somewhere … and that’s either higher taxes or printing more money (i.e. monetizing the debt which always causes inflation). Business people instinctually understand this. I am an investment sales broker. In a informal survey of my clients (including major institutional investors, and both large and small private investors), few if any believe that the Stimulus Plan will work; yet, virtually all felt that it will lead to both inflation and higher taxes. Several said that they were holding off on making new investments because of their fears of higher taxes, slower growth and inflation caused by the Stimulus Plan. That’s right! The so called “Stimulus Plan” is perversely having the opposite effect and is discouraging economic activity.

    John Maynard Keynes is famous for responding to a critic who accused him of flip flopping on an issue by saying “when the facts change, I change … what do you do?” You might want to keep that in mind. Also, you might want to keep in mind that Keynes believed that (federal, state and local) government’s share of GDP should never exceed 25%. He felt that any level above that amount would crowd out the more efficient private sector. Unfortunately, here in America we blew past that 25% max level decades ago. However; instead of shrinking our oversized government, President Obama wants to massively expand it. Worse of all, Pres. Obama is not pushing for the Stimulus Plan in order to stave off a bad recession; rather he is using the economic crisis as an excuse to implement his big government agenda (i.e. Socialism). In the words of Obama’s Chief of State, Rahm Emanuel, “a crisis is a terrible thing to waste”. This march towards Socialism is also causing many investors (especially, and ironically, the Chinese) to think twice before investing in America.

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