In Their Own Words: Nelson Rising On Risks Facing Our Economy

In our quest to bring you the biggest and best in the biz, Bisnow is pleased to present the first edition of "In Their Own Words," an exclusive series of guest columns from legends of the industry.

Giving his take on the real estate sector and his outlook on the economy, our first to the mic (or keyboard, as it were) is legendary developer Rising Realty Partners chairman/CEO Nelson Rising.

My name is Nelson Rising, founder of Rising Realty Partners. I have more than 40 years of experience in this industry, have done numerous deals, and have seen cycles—and fortunes—come and go.

Sure, the cycle could be coming to a close. Sure, the economy's been looking rocky lately. Nevertheless, there are a number of encouraging economic indicators to keep investors and real estate professionals positive in 2016.

For one, we have the job market; 2.7 million non-farm jobs were created in the US last year. The cumulative increase in employment since the trough in early 2010 is now more that 13 million jobs. Not to mention the unemployment rate dropped to 4.9% last month.

These economic gains, coupled with improved consumer confidence, helped lead to a record-setting 71.5 million vehicle sales in the US last year.

But some US regions are outperforming others. For example, the economic outlook in California, my neck of the woods, is particularly positive.

California employers added 60,400 jobs in December, growing at a 2.9% last year, outpacing the 1.9% rate nationwide. The fastest growth came in the construction industry, which expanded payrolls at 8.6%, and professional services, which grew 5%.

California’s other main economic drivers continue to be technology—not just the Silicon Valley, but also San Diego’s Biotech Beach and Silicon Beach in Los Angeles—tourism, trade, agriculture, entertainment, as well as in healthcare.

This encouraging news ultimately helps power regional commercial real estate markets.

On a national level, I'd expected the commercial real estate sector would remain strong headed into 2016, but it received another very big boost in late December when both Congress passed and the president signed a bill that made reforms to the Foreign Investment in Real Estate Property Act of 1980 (FIRPTA).

While initially passed to protect American assets, the law has instead limited overseas investment and development. FIRPTA imposed US federal tax obligations on most non-US investors with respect to capital gains of US real property interests.

The modification to FIRPTA allows foreign pension funds to invest through any structure, and this will mean hundreds of billions in dollars of new capital for US commercial properties.

Even though there are many positive economic indicators, we must be mindful of the headwinds we face. The steep drop in oil prices has led to a reduction in investment in the energy sector.

The economic conditions in China and the Euro Zone—as well as the increased value of the dollar—have had an adverse impact on trade and will negatively affect inventory purchases.
 
It’s also important to note the real estate sector is very sensitive to interest rates, and the key interest rates are close to historic lows with the 10-Year Treasury at 1.8%, the 30-Year Treasury at 2.68% and one-month Libor at 44 bps.

This is something investors and real estate professionals must watch closely throughout 2016, and beyond. Of course, in December, the Federal Open Market Committee (FOMC) raised the interest rate by 25 bps, one of the biggest stories to close the year, the first of four planned hikes.

But based on a careful reading of Fed Chair Janet Yellen’s Semi-Annual Monetary Policy Report to the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, I do not believe there will be a rate increase at the committee’s March meeting.

Keeping the interest rate untouched would be good news for the US real estate sector but, again: there are several other factors—especially in the global economy—we must keep a close eye on this year.