Norton On Real Estate: 2006 starts off as more active than past years

So far in 2006 (all of a month), we have been very, very busy. The hectic pace seems to have an undertone though. Having just finished a book about Henry Flagler, the builder of the East Coast Railroad, several resort hotels and the railroad to Key West, Fla., the current pace of business activity is like preparations for a pending hurricane. The proverbial batten down the hatches. Then again, this might be my overactive imagination.

We have had frantic buyers rushing to submit full-price offers on office buildings. We’ve had industrial tenants looking to trade up to better space, not more space, but better space — perhaps with more clear ceiling height, more offices or more loading docks. And we have institutional clients rushing to start large capital projects.

I strongly sense that rising interest rates are some of the motivation. Rising energy costs and real estate taxes also are pressing firms to become more efficient and cost effective in the use of their space.

Jeff Thredgold of Thredgold Economic Associates predicts a Dow of 12,000 by year’s end, a rise of 12 percent. He feels this will come about once the Fed stops raising interest rates in May or June. Baby boomers are realizing they need to boost their savings (soon!). So he sees a rush of money to stock mutual funds in 2006. Another driver here is the current and projected relatively low bond rates. Plus the anxieties about pension funds are promoting retirees to take lump sum cash payouts to invest directly themselves.

Over-55 homeowners are trying to realize gains from the substantial rise in home values over the last five years. Many are cashing out and need another investment sector in which to put their money to work.

Thredgold sees home values flattening, especially the second-home markets in the Southeast and the Southwest. He feels many who invested there in the past five years will sell and move their money into equities. All the talk of a housing bubble may be another factor promoting baby boomers to unlock the equity from their residential property.

2006 outlook

From what I can garner, most economic pundits feel 2006 will be similar to 2005, with modest growth (3 percent seems to be the consensus). Rising energy costs might fuel inflation (pun intended!), but so far it has been a relatively mild winter in the Northeast.

We can only hope it will stay that way. Gasoline prices have risen substantially in the past three to four weeks. This is attributed to concern that Iran’s restart of its nuclear program may lead to UN trade sanctions. Iran is the fourth largest exporter of oil, at about 6 million barrels per day. If there are trade sanctions, or more likely (as of this writing), when there are trade sanctions, that flow will drop by 2 million to 3 million barrels per day.

In short, energy prices continue to be volatile and will result in roller-coaster prices at the gas pump for the next five-plus years. Of course, more than 60 percent of U.S. electrical generation is oil- or natural gas-fired, which means electricity costs will continue to rise as well.

So far, the economy has absorbed these volatile and rising energy costs. How long the economy can continue to do so is anyone’s guess.

Looking out into 2006, we see general economic and business conditions similar to last year’s. We see softening in the housing sector. If this is the hiss of a slow leak, then the balloon will not pop. If the balloon pops, there will be significant impacts and ramifications throughout the region’s economies.

To return to the hurricane metaphor, there are storm clouds on the horizon. Whether the storm will pass us by or graze us or hit us straight on remains to be seen. nhbr

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE), a Fellow of the Royal Institution of Chartered Surveyors (FRICS) and a member of the board of The Initiative for a 20/20 Vision for Concord. He can be reached at

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