Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/102789
LEGISLATIVE UPDATE: 2013 by Adriann Murawski Lack of bipartisan negotiations has delayed economic growth, as federal uncertainties have forced U.S. businesses to adopt a wait-and-see planning model. Until Democrats and Republicans can work together, many businesses won't make long-term commitments such as expanding their office space or hiring more employees. Although clarity on federal rules will provide some relief this year, it does not guarantee economic growth. Congress spent the end of 2012 peering over the "fiscal cliff." Economists predicted another recession and a loss of nearly 1 million jobs over the next two years if lawmakers failed to make tough decisions on the Bush-era tax cuts, the alternative minimum tax, payroll taxes, automatic spending cuts, deficit reduction, and Medicare payments to doctors. After the cliffhanger, business leaders should expect to learn more about federal regulation. The overly complex Basel III proposed rules are one component of the Dodd-Frank Act. Dodd-Frank requires federal agencies to protect consumers by implementing regulations to avoid predatory lending practices. This becomes a slippery slope when proposed rules have great potential to hurt the U.S economy and its recovery. Basel III proposed rules would require banks to have more capital in their reserves. This requirement would result in tighter lending practices by financial institutions. Any proposed changes to banking regulations and capital requirements must be carefully analyzed to avoid unintended consequences. Consumer protection may occur, but local economies may suffer by not having adequate access to funding sources. Small community banks would be hit hard instead of the targeted large banks. "Without more information, it's impossible to determine if the proposed rules will set capital requirements at appropriate levels," said Sen. Richard Shelby, R-Ala. Another challenge this year is the Financial Accounting Standards Board's proposed rules on lease accounting. FASB is expected to release another exposure draft by April. Many real estate organizations, including CCIM Institute, have asked FASB to strongly consider the economic impact that changes to lease accounting could have on companies' balance sheets. For example, small business would be required to capitalize the costs of their lease, according to past proposals. The repercussions of this change would force some businesses into a high-risk category that would likely become a disincentive to rent commercial space. Looking further ahead, healthcare coverage will be a hot topic for both federal agencies and state governments. Beginning in January 2014, the individual mandate and several other requirements go into effect under the Affordable Care Act. States must either create their own health insurance exchanges or rely on the federal government to create an exchange for them. By October, exchanges must be ready for individuals and/or families to start making choices on their healthcare coverage for 2014. Congress will experience some growing pains this year. Americans are looking to elected officials for answers, and bipartisan negotiations are absolutely critical. American businesses and job seekers demand more than a wait-andsee approach to public policy decisions. Time is of the essence for our lawmakers to create a strong return to a vibrant economy in the year ahead. Adriann Murawski is legislative liaison for the CCIM Institute. Contact her at amurawski@ ccim.com. 30 January | February | 2013 Cleveland is another market that is seeing a positive transformation, with total returns of 6.27 percent during the past year, primarily based on the improvement in capital returns from -8.24 percent during the past three years to only -1.9 percent in the past year. In addition, income growth has increased consistently during the past few years to 6.16 percent during the past year, according to RERC's analysis. Tis market has also been led by meaningful vacancy declines and efective rental growth increases in the apartment and industrial sectors. Retail vacancy also improved, although effective rental growth remained fat, while ofce sector vacancy increased and rental growth was weak. Despite a decline in total returns to 4.25 percent in 2012 from 6.72 percent in 2011, per RERC's analysis, the income growth in Columbus, Ohio, rose to 9.45 percent this past year. Property performance generally followed that of the Cleveland market, but because of the change in income and a decline in ofce vacancy, this metro ofers better investment opportunity. Other metropolitan regions that are starting to pull out of the mire include Las Vegas, with a net change in income growth of 1,100 basis points, the largest growth of any of the top 48 metro regions. Even Detroit, which has been heavily undervalued in the past, has shown continually increasing income. Among some of the safer markets, total returns increased 12.09 percent over the past year in Nashville, Tenn., with even the ofce sector showing improvement. Houston and Denver are showing solid income growth, and the ofce sector, which is the most underperforming sector, is seeing declining vacancy and increasing efective rental growth. In addition, Minneapolis appears to have good growth potential from a capital returns perspective. An Improved View of Risk As risk and uncertainty continue to dominate the investment environment, relatively safe and solid investments will continue to earn lower yield as noted by the nearly nonexistent returns for Treasuries or cash holdings. Tat is partly why commercial real estate, with its reasonable income returns and potential for growth, is attractive as a long-term investment. Despite the relatively strong fundamentals and stability of this asset class, commercial real estate is not without risk, given its depen- Commercial Investment Real Estate