New York - With the employment picture expected to improve as a result of the implementation of the President's economic stimulus program, there are brighter prospects for the real estate markets going forward, according to participants at last week's Commercial Mortgage Securities Association (CMSA) 9th annual convention held in New York.

In the opening general session, Managing Director Tony Pierson of TimesSquare Real Estate Investors, identified sources of lifelines that would stimulate the national economy in general and real estate markets in particular going forward. He focused on employment data and its relationship to real estate fundamentals.

One of these lifelines is the joined forces of the "stimuli twins" - President George Bush (who would be up for re-election next year) and Alan Greenspan (who is looking to leave a favorable legacy). Pierson said that both the President and Greenspan recognize the current dire employment picture and would make deliberate attempts to employ effective measures to correct the problem.

Pierson expects the Federal Reserve to cut interest rates as much as another 50 basis points in their next meeting. President Bush, for his part, has "the power to get things done" and his economic stimulus program would take effect at the later part of this year, and would be fully felt in 2004. This is why Pierson expects that most jobs would be created next year.

According to Pierson, the Bush administration recognizes the fact that job growth under this administration has not been auspicious. During the Bush presidency, a 2.4-million job contraction has occurred. This level of job contraction has not occurred for more than five decades.

In terms of geographic considerations, Pierson presented an analysis of 50 metropolitan areas in the U.S. He said that there is "no significant pain anywhere," but there has been "moderate pain" spread throughout the country. The analysis stated that employment has declined in 29 metro areas. In contrast, only 21 of the areas in the study posted growth in employment.

Pierson added that while there has been six quarters so far of positive GDP growth, it has only been in the 2.5% to 3% range. In order for job creation to occur, a GDP growth of at least 4% is needed. Aside from this, consistent GDP growth is needed to drive investor confidence. What the market has seen so far has been patchy and sub-par GDP growth.

He said that the growth in the GDP was driven by favorable income gains, as those who are employed have experienced significant gains in their earning capacity. However, this was mitigated by the fact that unlike, in previous recessions, massive job losses occurred not only in the manufacturing sector but also in service-base businesses.

Real estate vs. corporates

Pierson said that real estate is still the asset class of choice in terms of asset allocation or on a relative value basis. "We often dwell on absolute value, but it is relative value that counts," Pierson said.

He added that real estate provides attractive returns in terms of debt and equity markets. It also has low volatility compared to other asset types. Also, there is still the specter of recent negative headlines in the corporate world as well as the issue of earnings and how these are evaluated. The most recent example of the Freddie Mac management changes comes to mind (see related story

on p. 15).

The real estate sector also has the potential to generate income for mid- to long-term investors. One reason for this is the favorable demographics in the U.S., which are better compared to some other industrialized countries, as the U.S. population has a comparably younger age set. This expected demand is also supported by immigration.

Pierson also noted that there is still a high demand from renters coming from the 25-34 year old age group, who probably are either waiting or could not afford to buy their own homes.

He commented on the different real estate sectors, stating that the retail sector benefits from positive GDP growth driven by high-income gains. This means that consumers who are gainfully employed could still afford to shop. On the other hand, the industrial sector has suffered from the weak global economy as trading has been hindered. The office sector has mixed results as it is dependent on the lease protection applied to the property.

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