As the gridiron and election seasons converge this fall, the issue of sequestration has become a major political football. However, it's too early in the game to discern what impact a scheduled $1.2 trillion in federal government spending cuts scheduled to kick in next January in the absence of a passed national budget might have on commercial real estate
Intended more or less as a legislative pact of mutual self-assured destruction, Congress mandated the forced spending cuts to kick in next year if it and the executive branch fail to approve a new spending plan by the end of 2012.
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As far as the CRE industry is concerned, the potential impact from the cuts appears to be just another in the long list of economic uncertainties that has been hindering a full recovery, according to a recent survey of CoStar News readers.
An informal survey of more than 800 readers asked them how much is the issue of looming budget cuts hindering corporate real estate decisions and are firms waiting for a clearer signal before making expansion, relocation or spending decisions.
While most said they believe the impact on deals was minimal, perhaps not surprisingly for such a politcal hot button, many of those surveyed voiced strong opinions on the issue.
One commonly expressed opinion was that: "Sequestration is just part of the much larger problem of a Congress caught in yet another Kabuki dance with the national budget. A poll of real estate investors would probably not identify sequestration itself as a major issue regarding future real estate investments but instead would focus on a lack of faith in Congressional action."
As to the topic of CRE impact, there was not much verifiable or anecdotal evidence that the uncertainty of sequestration is having any immediate wide impact on CRE.
"Aside from investor hesitancy due to the upcoming election and the specter of another four years of anti-business legislation, there is also quite a bit of hesitancy from both investors and employers regarding the issue of sequestration, especially in markets that are heavily reliant upon DOD [Department of Defense] spending and employment," said Christian G. Waller, commercial sales-leasing with Thalhimer in Fredericksburg, VA. "The sequestration issue has been in the public realm since early this year, but the press didn’t really seize upon it until the past month or so. Now it’s one of the hottest topics around in those markets that are heavily dependent upon DOD activity."
Douglas T. Linde, president of Boston Properties, did say the impact was dampening demand for space in his quarterly earnings conference call earlier this month, particularly as it relates to the REIT's Washington, DC, area properties.
"The unknown impact of the deficit reductions and spending changes and as well as the presidential election have really created a pretty soft demand environment," Linde said. "I think the one thing people talk about but don't like to sort of mention too loudly is the hypothetical impact of sequestration, which is the automatic budget cuts on the federal jobs, because we don't really know what it means. But we know that it would have a severe negative impact on the DC economy."
However, Linde added, "But I think there is consensus that we're not going to hopefully get to that point."
Chris van Heerden, director of CMBS and real estate research at Wells Fargo Securities, pointed out that sequestration cuts aren't the only defense cuts coming in the Washington DC metro area. "Looming defense spending cuts threaten to jeopardize defense contracts for the myriad of contractors in locations across the United States, leading to lease terminations," van Heerden noted.
Those potential changes are in addition to those resulting from the 2005 Base Realignment and Closure Act (BRAC) initiative to realign DoD agencies out of leased space.
"It is important to realize that BRAC move-outs are likely to increase vacancies throughout specific submarkets in Arlington and Alexandria, leading to overall softer leasing conditions in suburban Virginia, which can adversely affect non-BRAC’d buildings," van Heerden noted.
Craig L. Martin, president and CEO of Jacobs Engineering Group, probably put the whole topic in context best in his quarterly earnings conference call.
"My fundamental belief is that sequestration won't happen because we can't afford it as a country. But having said that, there is the risk that it will happen, and we've been looking pretty hard at what the impacts of that might be on the business," Martin said.
And what did Martin conclude?
"The biggest problem we have here is the unpredictability of what it means, and we’re well positioned as a company to take different strategic directions depending on what happens and to react to that fairly quickly," Martin said. "I think we’re being thoughtful about [sequestration] but it's one of those things where you take care of today and tomorrow will take care of itself."
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