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Economic Pulse Reports Address Global Risk of Inflation and Deflation
13 Oct, 2009, New York
Cushman & Wakefield, Inc. today issued its latest bi-monthly Economic Pulse reports which provide an in-depth analysis of current economic conditions in Asia, Europe and the Americas. The reports focus on the regional risks associated with inflation and deflation while assessing the impact of these important drivers on commercial real estate investments in each area. A brief summary of each report is outlined below.
For full copies of the Economic Pulse reports, please visit Cushman & Wakefield's
According to the report, the US economy is not in recovery and an upturn is not likely to take place until late this year or early in 2010. Until then, the economy will continue to shrink, fewer people will have jobs and more will become unemployed. However, the moderation in job loss indicates that the speed of the collapse is beginning to slow.
With inflation in check due to a lack of demand in the economy, the key ingredient necessary for a recovery to take shape will be a rise in employment which is not anticipated in the near term.
Vacancy is rising slowly in most Canadian office markets, with the exception of Calgary and Toronto central markets where the combination of weakened demand and significant new supply is causing added strain. Across Canada, rental rates have softened, but most markets are now observing a slowing of annualized decline. The national office vacancy rate at the end of the second quarter increased to 7.6%, still exceptionally tight. While tenant activity stalled, a rekindling of demand is occurring in many markets, including Vancouver and Toronto. Demand in Ottawa, Canada's capital city, remains strong, driven by the appetite of the federal government.
The industry and real estate sector most negatively affected by the crisis and inflation in Mexico has been retail. As has been the case in the US, consumers in Mexico are very uncertain about their employment situation and are limiting spending to all but necessities. The office market in Mexico has not been as negatively affected by the global recession as many other regions because the market was not overbuilt. With little excess product, the vacancy rate has increased from about 5% before the recession began to between 8% and 9% today. As the market is still in balance, there has been little decline in rents, which are down in dollar terms because of the decline in the peso, but peso rents have held steady.
In South America, the commercial real estate market has not been affected by inflation in the past five years and this trend is expected to continue in 2010. Rents have increased much higher than inflation in the past three years, and, for 2009/10, they are expected to remain in step with, or above, inflation rates (all rents are adjusted by inflation by law on an annual basis). The only factor that might depreciate rent value is a lack of demand and/or a high volume of new stock entering some markets, but any reduction will be short term only.
Europe is currently in transition from relatively strong inflation in 2008 to much lower inflation or even deflation now. Looking ahead, there are clearly conflicting pressures acting but our analysis emphasizes the differing timeframes over which these will impact, with most inflationary forces only likely to take root once economic growth is firmly re-established. In the short term, which may mean 1, 2 or even 3 years, price pressures look set to be volatile but subdued and whilst perhaps not sustained or widespread, deflation will be an issue as domestic demand remains muted, government and central bank stimulus run their course and internal deflation provides a route to restore competitiveness.
As with growth however, inflation and deflation trends will vary significantly in different parts of Europe and for real estate, strategies will clearly need to vary market by market. Moreover, few strategies will have a life span less than five years, hence occupiers and investors face not just the issue of how to deal with inflation or deflation, but how to deal with both. This calls for flexibility and compromise - in seeking for example to share risk between occupier and owner. It also demands a focus on the right real estate and the right management. For investors, other than in extreme periods, prime property will cope best with either inflation or deflation, in safeguarding liquidity and maintaining or growing income. For occupiers, it demands the complete integration of a robustly tested real estate strategy with business needs, prioritizing locations and facilities and aligning ownership and lease structures to give the flexibility to change with the business.
In the longer term, inflationary pressures will eventually mount in Asia, emanating from a range of different governments policies from both inside and outside. Governments worldwide are being forced to run loose monetary policy with low interest rates, a scenario that will continue for some time due to the high levels of debt held by consumers, companies and governments in advanced economies. Those effects will find their way to Asia via linked policy rates and exchange rates.
Real estate prices in most of Asia are on solid growth trajectories due to good demographics - large populations of relatively young workforces - combined with low levels of debt, and plenty of savings.
Asia is well on its way to recovery with all the major Asian countries on expansion paths. In all real estate markets, there will be points where supply will temporarily exceed demand, but on the upside, the rate of demand in Asia is expected to pick up given it has money to spend and is not laboring under debt.
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Cushman & Wakefield is the world's largest privately-held commercial real estate services firm. Founded in 1917, it has 230 offices in 58 countries and 15,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within four primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, valuation services, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners, and Consulting Services, including business and real estate consulting. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at www.cushmanwakefield.com.
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