While it’s routine to make predictions at the beginning of the year, it’s not so common to do so when the year is half over but I feel compelled to do so. There are a number of factors that have been set in place over the past several months that will start having an impact on commercial real estate. Let’s go through four of them:

Regime change at The Federal Reserve – Ben Bernanke’s term as Chairman of The Federal Reserve comes to an end in January of next year. There are several candidates being considered to replace him. I do not pretend to know a “good” candidate from a “bad” one. That is beyond my pay grade. But what I do know is that the markets do not like uncertainty. With uncertainty comes a jittery market with wide market fluctuations. So the sooner they nail down his replacement, the better.

The tapering down of Quantitative Easing – As I discussed in my last blog post Ben Bernanke hinted that he was ready to start slowing down the purchase of $85 billion in bonds and with this pronouncement the world’s markets went bonkers! Then Thursday of last week Mr. Bernanke said that The Fed doesn’t plan to end quantitative easing anytime soon and the market soared. I wish I knew if he truly plans to slowly end quantitative easing. If he decides to postpone the tapering of QE then I would expect interest rates to trend downward. Now I wouldn’t expect rates to go back to where they were prior to his original announcement but they will likely come back down significantly. And if he truly tries to taper The Fed’s purchases of U.S. bonds then interest rates will continue rising significantly higher than they are right now.

The full implementation of Dodd-Frank – Recall that this bill is a sweeping overhaul of the banking regulatory system in response to the 2008 financial meltdown. I was generally in favor of the bill. It was necessary to correct some of the most egregious flaws in our banking system. But the making of legislation can result in unintended consequences. In this case significantly more regulation and more government oversight which is bogging down the system. If you think it’s difficult getting loans approved now wait until all of the Dodd-Frank provisions are implemented.

The slowing down of the world economy – Europe is in its second year of recession, China is slowing down, Japan is trying to jump start its badly faltering economy while the U.S. economy is limping along. So why should we care what the world economy is doing? Because it affects us. Thirty percent of U.S. GDP is tied to our exports. Europe is our largest trading partner and if our export market slows it will eventually slow down the American economy.

So what do I think is going to happen?  These are my predictions:

The president, realizing the importance of keeping the markets calm, will announce the appointment of Mr. Bernanke’s replacement within the next 30 days. This person will be perceived as friendly to the markets so as to further calm the markets.

Tapering of the quantitative easing program will not occur in the next 12 months. This means rates will slowly trend down but still will be higher than they were 3 weeks ago.

The full implementation of Dodd-Frank will cause lending to become significantly more difficult especially in the near term until solutions can be proposed and implemented offsetting some of the more difficult aspects of the bill.

The world economy will continue slowing down but the U.S. economy will continue to grow for the foreseeable future.

Those are my predictions. If my guesses are true, how will this economic and regulatory climate affect Pacific Northwest commercial real estate in the next 12 months?

Interest rates will taper down (no pun intended) and will stabilize in an interest rate range that makes it worthwhile to refinance and to acquire properties.

Cap rates will stabilize and might even increase a bit now that the end of QE is being considered.

Lending will become more difficult. Closings will take much longer as loan processing becomes a nightmare. Paper work will continue to grow.

The financial health of the small financial institutions will continue to decline causing more banks to be acquired by their healthier brethren.

Those are my thoughts. I welcome yours. What do you think is going to happen in the next 12 months?

Sources: Real Estate – The Next Six Months, by Pater Tenebrarum, Seeking Alpha, June 24, 2013; Obama hints at Bernanke retirement, by John Aglionby, Business Day Live, June 19, 2013.