Breaking down the core opinions of the bear and the bull decision maker – differences between them in global and economic outlook, and how to know which of them you are.
As commercial real estate professionals we interact with business decision makers every day.
In doing so, we learn so much about what drives their decisions and we are grateful for that privilege. Each of you faces unique daily challenges created by a variety of economic variables. Some are global and others are local. Real estate market conditions figure into that mix.
As a tenant, you need quality space that allows your business to operate efficiently. As a landlord, you focus on occupancy and rent growth trends. As an owner/user buyer, you are keen on low interest rates to help control your occupancy cost while building equity.
The bottom line is: everyone is impacted by the economics of the time and that gives rise to some strong opinions on where the economy is headed and how it will get there.
So, with that in mind, we came up with the idea of staging a debate that explores opposite points of view on topics that heavily influence business decisions of all kinds, not just real estate.
By offering both bullish and bearish (optimistic and pessimistic) views on each topic, you may get a clearer picture of where you stand on the issues.
We suspect that there are very few pure bulls or pure bears out there, but for this exercise, we decided to present the issues in just that fashion. So, the views expressed here are not necessarily our own. Rather, they are deliberate polarizations meant to aid in the discussion of very complex problems.
Welcome to Smackdown: The Bulls vs. The Bears
Before we get specific to the commercial property market, let’s take a look at a couple of global economic issues to get some high altitude perspective on what tends to shape the mindset of business decision makers, especially those running multi-national corporations.
The bulls see the world economy as having enough momentum to fend off another world recession.
Chinese stock markets have settled down due to proactive measures taken by the Chinese central government and the Bank of China. Chinese GDP is stabilized in the 7% range and hundreds of millions of citizens have been lifted out of poverty. The economy, say the bulls, is working through a transition to a more consumer based model, and they accept bumps in that road as part of the process.
The EU, despite the challenge presented by the recent Brexit vote, is still holding together and the Euro has stabilized in the past several weeks. The European Central Bank is pursuing an aggressive monetary policy designed to stimulate growth and chase away fears of a deflationary cycle.
Reforms in EU governance are being proposed, as the powers-that-be in Brussels acknowledge that some of the more heavy-handed regulations are hindering growth and sovereign autonomy. The Bank of England has promised to take swift action to counter fears of a recession in the UK as the exit strategy is developed and executed over the next two years. Concerns that London will lose its dominance as a financial center are overblown.
Throughout the world, central banks have kept interest rates low to stimulate more lending and business investment, which fuels job growth and boosts the all-important consumer spending metrics over time.
Some nations have even resorted to negative interest rate policies, proof positive of their commitment to restoring economic growth. Mario Draghi, the President of the European Central Bank, has said the ECB will do whatever it takes to get the job done.
Stock markets have responded by moving higher after the Brexit scare, and the recent rise in energy prices may signal a bottoming out of prices that fell sharply back in 2014.
Higher oil prices should stimulate capital spending in the energy sector around the world, but especially in the US, which should stimulate manufacturing activity and stem the tide of recent domestic job losses.
The Bears, on the other hand, see a drastically different picture.
They believe that China is in much worse shape than it appears to be because the Chinese government is cooking the books to paint a rosier picture.
Private and sovereign debt levels in China have skyrocketed and a housing bubble, fueled by speculative buying and overbuilding, is about to burst.
Over-capacity in the manufacturing sector is idling major companies, as falling demand for exported goods is not being offset by enough domestic consumption.
Underperforming state-owned companies are being propped up by government loans they may not be able to repay. Bears think the 7% growth number coming out of China is suspect at best.
The European Union, the bears say, is at peril.
They point to the fact that the model can’t survive as a political union without the clout of a fiscal union to go along with it. Think Greece. The tiny country has been bailed out time and again because it can’t seem to get its fiscal house in order.
Other EU countries, mindful of the integrity of the Euro as a common currency, keeps lending money to Greece that no one believes can or will ever be repaid. Other countries like Spain and Portugal are following the same path and are not far behind, which only serves to undermine faith in the long term survival of the EU.
The UK’s decision to withdraw from the EU may be just the beginning, the bears believe, as other countries may follow suit for their own protection.
GDP growth is hovering just above zero across the pond, and fears of deflation still weigh heavy on the minds of many, even after unprecedented action by the European Central Bank, which has sent interest rates into negative territory to stimulate more lending.
Also, the recent decision by the European Commission in Brussels ordering nearly $14 billion in taxes and penalties be paid to Ireland from Apple, has sent shock waves through the corporate community. Even Ireland, is set to appeal the decision over fears the country could lose its standing as a friendly home for major corporations.
The idea of unelected bureaucrats wielding that kind of power is scaring people more each day, and is also giving rise to more nationalistic political parties throughout the EU.
Who are you?
What side of the line do you fall on? Like us, you probably see valid points on both sides depending on how close you are to these few issues.
Your business may be less dependent on global economic factors than General Electric, Apple or Microsoft are, but it’s the macro issues that set the tenor of economic discourse and the psychology of decision making at all levels. So, it is important for all of us to be informed on as many issues as possible so we can decide which ones we should take into account when it comes time to take action.
We will take a look at the policies of the US Federal Reserve Bank in our next post (Click here to be notified when we release it).
The Fed wields enormous power through its ability to control the cost and flow of capital, the lifeblood of our economy.
We welcome your input on any of these issues. So, feel free to weigh in with your thoughts.