Tighten Your Belts!

By Kenneth P. Riggs, Jr., Chairman & President, Real Estate Research Corp.

A new year always prompts hope for a better tomorrow and better performance from investments. But given our continued slow-growth economy, debt as far as the eye can see, and our fiscally-challenged government, what can investors expect from the capital markets in 2013?

• Low interest rates due to the Federal Reserve’s very accommodative monetary policy will continue for the near term, although yields on Treasuries, bonds, and cash investments will remain very low. However, there are signs of increasing pressure to raise interest rates sooner than many investors expected or than Federal Reserve Chairman Bernanke had predicted. Don’t be surprised if rates increase within the next year, as the U.S. is forced to begin paying down its debt.
• The changes in tax structure for upper income families, increases in payroll taxes, higher health care costs, and new banking regulations due to the Dodd-Frank bill will negatively impact economic growth. And by March 1, we will know more about the effects of increasing the debt ceiling and spending cuts/sequestration. Most economic forecasts have been reduced for 2013, with GDP growth expected to start out slower in 2013, and to end the year with an annual growth rate similar to that of 2012.
• The recent run-up in the stock market after the fiscal cliff was averted (mostly) was pleasant enough, but for the most part, the stock market has been trading off accommodative monetary policy versus fundamentals. Volatility will continue as our legislators struggle with setting a new debt ceiling, the credit agencies threaten to lower our credit rating if plans for meaningful debt reduction are not approved, and the rest of the world continues to deal with slow growth.
• Commercial real estate will remain attractive in 2013, particularly to those investors looking for transparency in their investments, reasonable income-producing returns, a hedge for inflation, and relative safety. Although higher prices have resulted in reduced returns in 2012 for core properties in core locations, returns will remain solid on a risk-adjusted basis for 2013. In addition, there are higher return opportunities in the secondary markets with higher risk properties.

I think—hope—that sensibility is starting to return to our legislators. Within a month or two, we will face another crisis related to raising the debt ceiling, but surely there is the recognition from both sides that this time we must also make the difficult decision to reduce spending. The pain is just beginning, and we face a serious time of belt tightening.