Will budget cuts affect commercial real estate?

August 03, 2011 02:07PM

President Obama and Midtown Manhattan

Now that the debt ceiling has been raised and budget cuts have been agreed upon, the real estate industry’s focus shifts to how the new legislation will affect the commercial market. And according to Chris Macke, a senior real estate strategist at the CoStar Group, in an article for Forbes, that all depends on whether the economy has slumped because of a reduction in demand, or because federal spending has corporations concerned over forthcoming tax hikes.

If it’s the former, then the commercial real estate market could be in for a rude awakening. With the federal government spending $2.7 trillion less over the next decade, or $270 billion less per year, many private sector companies who do big business with the government will find their revenues slashed. In that case, corporate America certainly would not increase hiring and demand for commercial real estate would be stifled.

If, however, the spending cuts help relieve fears of increased corporate taxation — that is, if the budget reductions replace taxes — private sector firms that were previously hesitant to invest in expansion may be compelled to deploy those dollars. Under that scenario, hiring would pick up, commercial real estate would be in demand, and an overall housing recovery could follow.

Now, it’s simply a matter of finding out which school of thought accurately explains the current recession. [Forbes]