Gambling Against Terrorists On Office REITS?
Office buildings have long been a favored commercial real estate investment sector. Office leases tend to be long enough to afford predictability, while at the same time including standard annual CPI increases as a hedge against inflation.
But as was the case with housing, the real estate bust took its toll on the nation’s office sector. Not only in terms of vacancies, which shot up by over 10%, but also in terms of new office construction.
Except for a handful of high job growth regions, very few office buildings have been built since 2008. The good news is that, according to a new Census Bureau report, September’s office construction is up 18% over last year and several of office REITS are already looking more attractive.
Why should this matter to anyone else? For starters, it represents 37 billion in annualized construction dollars, which significantly impact local jobs and economies. For perspective, office construction spending hit almost $60 billion in 2008, then dropped to only $21 billion in 2011. When we talk about jobs and wages that still haven’t recovered, this is precisely what we mean.
But more importantly, growth in office construction spending signals investor and lender confidence. It's a lack of confidence from these exact folks that's been holding back a fuller recovery in housing and commercial real estate alike, without which a broader economic recovery just ain't gonna happen.
So what's left to screw it up? Glad you asked. The Terrorism Risk Insurance Act was passed after 9/11, a $30 billion plus insurance event, at a time when no insurer in its right mind would insure office buildings against the risk of another terrorist attack. Without coverage, lenders of course wouldn't lend and investors took a major time out.
The Act is set to expire December 31, just six short (particularly considering the intervening holidays) weeks from now. The Act essentially provided a government back stop, increasing private participation and breathing new life into office building lending, acquisitions, construction and renovations.
Already insurers are including springing exclusion clauses in policies which would eliminate terrorism coverage if the Act isn't re authorized. If that happens we can kiss bye-bye to anticipated near term gains in the office sector.