by Randyl Drummer for CoStar Group
With Washington facing a showdown in less than two months for reaching a deal on the government’s debt ceiling, many observers are weighing the potential impact on the commercial real estate recovery depending on various scenarios the Congress may pursue in dealing with this matter.
On May 16, the U.S. government smashed through the $14.29 trillion statutory limit that the government could borrow to finance obligations such as Medicare, Social Security, military salaries and interest on the national debt. The Treasury Department is using what Secretary Timothy Geithner called “extraordinary measures” to keep the government afloat until Aug. 2, at which point the nation will exhaust its borrowing authority and default on its debt obligations.
On April 18, Standard & Poor’s downgraded its outlook on U.S. debt from stable to negative, meaning that if fiscal deterioration is not reversed, the nation’s current stellar AAA rating will be downgraded. Soon after the House of Representatives last week rejected a measure to raise the ceiling, prolonging a budget standoff between Democrats and Republicans, Moody’s Investors Service also warned that the U.S. government’s top credit rating could be in jeopardy.
If there’s no progress on increasing the statutory debt limit in coming weeks, Moody’s expects to place the U.S.’s rating under review for possible downgrade due to the “very small but rising risk of a short-lived default,” the rating firm said.
Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations, the firm said. “The heightened polarization over the debt limit has increased the odds of a short-lived default.”
“The real question commercial real estate should be asking is how large the budget cuts will need to be to get Republicans to buy into raising the debt ceiling, and what impact those budget cuts will have on GDP. Commercial real estate demand is correlated with GDP,” observed Chris Macke, senior real estate strategist for CoStar Group.
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