June 12, 2024 - 7:00pm
Commercial real estate is back in the news, and itâs bad timing for President Joe Biden. Last week, the New York Times reported that the number of commercial buildings in distress was rising sharply, while recent data shows that prices are down 21% from their peak. All this raises the question: why has the fall in commercial real estate not created a property crisis?
The short answer is that it should have. On an inflation-adjusted basis, commercial structures investment in the United States is down from its peak of $200 billion in 2022 to $173 billion today. In normal times, this would result in an uptick in unemployment and potentially a recession. Yet the American economy remains at full employment.
The most obvious explanation for this is the Biden administrationâs Inflation Reduction Act (IRA). Signed into law in the summer of 2022, the act marshals an enormous $891 billion in total spending, and has been marketed as a green energy and industrial policy. While it is unclear whether it will succeed in achieving either a green transition or a reconstruction of American industry, it has undoubtedly given rise to an explosion in factory construction.
At the end of 2022, inflation-adjusted manufacturing construction investment stood at $82 billion. In the first quarter of 2024, it had increased to $148 billion. Commercial structure investment may have fallen $27 billion but this has been more than offset by a $66 billion rise in manufacturing construction investment. The Biden administration likely did not plan this: it was just fortunate that passing the IRA in 2022 came at a perfect time to prop up the soon-to-be ailing commercial property market in the US.
This lucky manoeuvre has not just propped up American employment â it has also likely kept the lid on another major financial crisis. If the commercial real estate market were to blow its lid, it is likely that the banks and financial institutions providing the credit would suffer. Particularly important here are private equity and private credit firms, which have stepped into the breach to engage in risky lending now that banks have been banned from doing so due to post-2008 regulations.
The Biden IRA keeps the commercial construction sector buoyant, and this allows banks to continue engaging in an extend-and-pretend strategy vis-Ă -vis their underwater property loans. Every few months we hear about another bank under severe strain. In February, for example, New York Community Bancorp posted a loss of $252 million, causing its share price to decline by 38%. The only reason that instances like this do not create a market panic is because the overall market is being propped up by massive government spending.
This raises the question: can this show be kept on the road between now and the election? With Biden already struggling in the polls due to voters viewing his economic track record as dismal, a serious credit crisis or meltdown of the housing market could be the final nail in the coffin. The smart money says that the crisis will be contained between now and November, but we should expect increasing signs of strain. If Donald Trump wins the election, as polling currently suggests, he will be inheriting an economy held together with rubber bands and bits of string.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeSo IRA is larger than TARPA that amounted to 700 billion dollar. If you print money the value of that money will decrease. Currently every 100 days 1 trillion dollar is added to USA’s national debt. Does anyone really believe that this can go on forever?
If 30 years is forever, then yes. Thatâs how long Iâve been worried that our massive debt will crush us. Yet here we are at new stock market highs and MSM shouting about how great things are.
The holding the economy together with rubber bands and bits of string goes all the way back to 2008. To me, the bank bailout was a major turning point. Here was the greatest sign of economic dysfunction seen since the Great Depression. American politicians were confronted with a choice. Option one was to take their medicine, let the banks fail, and confront the long term issues such as deindustrialization, overregulation, exploitative trade, corporate/financial political influence, and so on that had long been eating away at the fundamental foundations of America’s economic strength. Option two, apply a band aid solution and avoid the economic reckoning for a while longer, kicking the can down the road for some other politicians to take the blame. American politicians, being mostly spineless, clueless opportunists with little understanding of history, economics, nor any meaningful leadership skills, gleefully picked the latter over a vast majority of public opinion (some polls showed over 80% of Americans opposed the bailout).
Biden and the establishment types who backed his candidacy have a problem. The people are never as stupid as the aristocrat classes believe them to be. The people don’t believe the numbers. They’ve been fed those numbers for a couple of generations now even as factories closed and wages stagnated. People figured out those numbers don’t matter to them personally or to their local economy, so they ignore the numbers now. As good as Biden’s economic numbers have looked and as much as the media has tried to sound the horn on how ‘great’ things are going, Biden’s low approval rating on economic matters has barely budged. Clearly the present tactics of citing economic indicators isn’t working, but they apparently have no other plan.
I give Biden and the establishment some credit for finally seeing what’s needed and moving towards a degree of economic nationalism. Building useful things like factories, roads, laboratories, bridges, etc and supporting technology and research efforts is what we should be doing and should have been doing for a while now. Unfortunately for them, it’s far too little and far too late to save them from the anti-establishment mood that now dominates politics. That’s what they’re fighting and why they’re losing. In an election between two unpopular candidates whose personal failings are numerous and obvious, the election may turn on the default mood of the country, and the default mood of the country is anti-establishment. There’s nothing Biden can do to move that needle. On the other hand, there’s plenty that could go wrong between now and November that turns a close election into a devastating Trump landslide that will change the course of American politics for decades to come, such as an economic crisis or a bad turn of events in Gaza or Ukraine. The best Biden can do is hope the band-aid solutions hold for a few months longer, hope nothing else goes wrong, and hope that Trump’s unpopularity proves greater than his own. Hope is his only strategy.
I agree with you that thereâs high risk built into the current economy, especially between now and November. Also, agree that another Trump termâwhether elected in a landslide or by the skin of his teethâwould be devastating for the entire world.
Where I donât agree is your assertion that we should have let the banks fail in 2008. While it would would have been seen as just moral desserts, it would have tipped the Great Recession into the Great Depression II. The original also caused a seismic shift in American economic policy, it was at the cost of the bloodiest war ever fought.
TARP led to 11 more years of low interest loans that discouraged saving. This meant that the government had to pump more money into the economy to save it from the disaster of the pandemic shut down leading to high inflation exacerbated by a massive supply chain disruption.
I understand that the sense of economic sentimentâdivorced entirely from actual consumer sentimentâamong Americans is low. Much of that is caused by the ongoing affordability crisis in healthcare, child care, education, and housing. Trumpâs handling of the pandemic and its related economic crisis, was real time disaster. How we Americans have this notion that Trumpâs handling of an economy he inherited from Obama and then goosed with soon-to-expire-except-for-the-wealthiest tax cuts, his only actual achievement in office, was more successful than Bidenâs is a complete and total absurdity.
Letting the economy fail and then ârebuildingâ it wonât help anyone. Thatâs because the rebuilding will need to be done by a competent administration and we will be waiting a long, long time for that if Trump gets reelected.
Why would a Trump term be devastating for the entire world? Biden has been about as bad as possible at foreign relations.
I’m not a great fan of protectionism but Biden has arguably kept those aspects of Trump’s policy anyway, and printed way more money with the cynically-named IRA.
It’s actually going to be the Inflation Creation Act (ICA). Check back in 5-10 years time to measure the effects of these policies. The West is as committed to printing money and ever more bailouts as ever.
Jim V is correct – we should have taken the medicine in 2008 (and preferably well before that). Every year we put it off, the disease gets worse.
YesâŠhow printing more money could ever be considered an inflation reduction act is far beyond the pale.
There are many people on the Democratic side who suffer from Trump Derangement Syndrome and fear the worst – but there are many people on the Republican side who suffer from Deranged Biden Syndrome and fear the worst.
What a world to live in.
Itâs a mess for sure. My biggest beef with Biden and progressives is this relentless, unhinged drive towards net zero. It is the biggest threat to our privileged way of life IMO. If any of these people supported widespread adoption of nuclear energy, I would be much less concerned.
Difference is that Biden has proved us correct.
Because people that hate him canât see anything else.
âWhere I donât agree is your assertion that we should have let the banks fail in 2008.â Some banks would have failed, but not many if left to fend for themselves. The titans of Wall Street would have worked it out among themselves and decided which of their colleagues who took on too much risk would be left on the cutting room floor. Several well run banks tried to refuse the Tarp loans, but were forced to play along.
Thatâs the plan I suspect; instead of living the consequences of their policies they get to blame the Donald. This is why I wouldnât mind if Biden wins. Whatâs coming would see them out of power for a generation after that.