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...in Afghanistan and Iraq, high fuel prices, and last summer's hurricane damage to New Orleans and other communities along the Gulf Coast--the U.S. economy has not just survived, it has performed remarkably well. Gross domestic product is growing, job creation is strong, business investment is increasing, Americans are still shopping, and we citizens are wealthier than we have been in the history of this country. Further, some of the wealth lost after the tech bubble burst is finally starting to reappear in the form of improving stock returns. Even the housing market, which has slowed slightly from last year, continues to grow. Despite media reports about an impending housing bubble, home sales are on track for the third largest year on record, according to the National Association of REALTORS[R].
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Unfortunately, even in such strength, the risk affecting our economic growth--and commercial real estate returns--is growing as well. Long- and short-term interest rates are increasing. Inflation appears to be on the verge of taking hold. High fuel prices have resurfaced and likely will stay with us for year or more. As a new government begins to take shape in Iraq, geopolitical risk seems to be increasing in Iran, North Korea and other parts of the world.
PREPARE FOR DECLINE IN CAPITAL APPRECIATION
In the commercial real estate arena, capital appreciation remained strong in the first quarter of 2006. However, the chance that the capital or appreciation component will reverse its trend is not merely likely, but inevitable. This risk will continue to mount through 2006 and into 2007 as capitalization rates experience upward pressure from rising rates and improving returns on alternative investments such as stock and bond markets.
This economic climate has prompted the Federal Reserve System to keep a watchful eye on the real estate market for the last year or two. The residential market has cooled in certain areas, but fundamental indicators in the commercial real...
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