Rosen: Slow Recovery, Job Creation

News & Awards.

TMG Partners has won awards for many projects
including honors for “Best Mixed Use,”
“Best Office,” and “Best Historic Rehabilitation”.

April 24, 2013
The Registry
Rosen: Slow Recovery, Job Creation

The U.S. economy will grow less than 2 percent this year, a full percentage point below the 50-year average, and only slightly more jobs will be created than in 2012, predicts Berkeley economist Ken Rosen.

But the debt and housing excesses that produced the 2008 financial crisis are subsiding. The U.S. trade deficit, at 6 percent of gross domestic product in 2007, is now half that. A surprise energy boom is creating the hope of U.S. energy independence in the next 10 years. Corporate America is thriving, and auto sales are good.

The U.S. lost more than 6.5 percent of its jobs, or 8.8 million, at the peak of the Great Recession. It is slowly pulling itself out of that hole, producing 6.5 million net new jobs so far, Rosen said. He predicted the economy would regain the remaining 2.3 million jobs in the next 18 months.

Between the technology industry and the energy boom, more of the country is participating in the recovery. In the year ended in February, San Francisco created 36,000 jobs, San Jose 28,600 and Oakland 25,000, Rosen said. San Francisco has now recovered 123 percent of the jobs that it lost in the Great Recession, San Jose 101 percent of its jobs lost, while Oakland has recovered half. "We have had a lot of job creation, and the private sector is doing great," he said.

Rosen was again keynote speaker for the annual Fisher Center Real Estate Conference sponsored by the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. Rosen is chairman of the Fisher Center and a sought-after economic prognosticator.

Speakers throughout the daylong session April 22 noted signs of recovery in the commercial property markets, including the commercial mortgage-backed securities market, which was decimated. While loan orginations through the CMBS process remain a fraction of their 2007 high when they reached $228 billion, this year promises more than $70 billion in new issuances, said Jean Baker, managing director for LoanCore Capital LLC. That compares to not quite $50 billion last year.

"More and more, there are investors coming back into the CMBS space," she said. That is driving interest rates down and closing the cost-of-capital gap with insurance companies and banks.

Michael Covarrubias, head of San Francisco's TMG Partners, said he doubted that the technology sector would founder or that its current good health would again prove a mirage. TMG has bought, leased and sold Bay Area properties at a furious pace in the last three years moving from San Francisco to Silicon Valley. "So the question is if this is a bubble in the Bay Area and will tech crash? If tech did this well in an unhealthy economy, will it crater when the economy gets stronger? Seems unlikely."

Rosen has been an interest rate bear for at least three years, warning that rates were destined to rise and that real estate investors be wary. He also emphasized concerns about inflation, saying that he expected in the next three years for it to rise to a 3 percent or 4 percent annual rate. "Right now, inflation is in the 1.5 percent range, but don't be fooled by this. The whole world is printing money," he said.

But he also acknowledged his own mistakes, noting that interest rates have in fact not risen as he has predicted: "I don't know when it will happen honestly, but it is 100 percent sure that rates will go up from here. I will be right eventually."

He also warned on capitalization rates, saying that investors who are accepting very low yields, even below 3 percent in the Bay Area, are taking unwarranted risk. "You could argue that relative to other things, real estate looks good, but the worry I have is that cap rates only go up from here and the question is, how much?"

Unlike some, he also said he is not worried about the aggressive apartment construction based in large measure on an anticipated burst of household creation in the next five years. Grown children forced to move back home will leave parents, he said, and more compellingly 4.2 million Americans a year will attain age 18 over the decade as the millennials grow up. That is about a million more new 18-year-olds a year in the United States than have been being minted in the last two decades, he said.

Back to top