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First Person: Ted C. Jones, Ph.D., Senior VP & Chief Economist, Stewart Title Guaranty Company

Feb/Mar 10
What is the current state of the recession in the United States?
What we have right now is a wrong definition of recession. The current definition that Congress goes by is two or more consecutive quarters of decline in gross domestic product, but that doesn't cover the pain factor. I think the new definition should be six or more consecutive months of decline in employment because I don't see how you can ever have a jobless recovery.

Can you tell me where we stand on unemployment?
From January 1, 2008 to January 31, 2010, we lost 8.4 million jobs in the nation. We have 100,000 to 120,000 net new people who enter the work force every month. So to just stay even you need to create 100,000 to 120,000 new jobs a month. Taking that into consideration, we've lost another 2.75 million, so we are down at least 11 million-plus jobs.

What do you see ahead for lending in commercial real estate?
Where we are at right now is a complete lack of funding for commercial real estate. There are $3.5 trillion of commercial loans outstanding, and we've got $400 billion that is due to refinance in the coming 12 months. And the money is just not there. The experts on Wall Street are saying we're going to be at least $300 billion short, so we're only going to get $100 billion of total lending in the commercial real estate marketplace this year.

What about commercial real estate sales volume?
The total commercial sales volume in the United States for 2007 was $557.8 billion. In 2008, it was $181.6 billion. In 2009, it was $54.4 billion. So our total commercial sales volume in 2009 was less than one-tenth of what it was two years ago.

Can you give us some examples of commercial real estate values today?
The National Council of Real Estate Investment Fiduciaries is a trade association of pension funds that have more than 6,200 Class A properties in their portfolios.  They look at what property values have done for industrial, apartment, office, and retail. If you bought an office property in the third quarter of 2007, it's now worth 41.1 percent less.

If you bought a retail property in 2007, by the end of 2009, it was worth 31.2 percent less. If you bought an industrial property in the second quarter of 2007, it was worth 42.4 percent less.  Those estimates are being realized in this database of sales transactions.

Is there a silver lining in all of this?
In the next 12 to 24 months, I think we are going to see what are probably the best buying opportunities that we've seen since 1988-89.  We're going to look back five years from now and slap ourselves for not having bought more commercial real estate.  You'll think, "I could have bought that building for $5 million, and it just sold for $19 million." We sit at the crossroads of incredible opportunity amongst the ruins of current investors.

Where do you see interest rates going?
I see interest rates spiking, and when I say spiking, I mean a 200 basis points increase or two percent. Commercial loans are so many basis points above a 10-year treasury note, depending on what type of property quality you have and where it's located. We're going to be looking at 100 to 200 basis points more a year from today, and I'm skewing more toward the 200 basis points side.

What about job growth?
We haven't been spending money that really creates jobs, so I think we're going to see tepid job growth. It's going to be like tulips coming out of the ground after a severe frost.  They're going to be a little mangled, but you're going to see some. This is assuming that Congress acts. If they don't, it's going to be worse than tepid. For every 100 bulbs planted, you won't see a whole lot of foliage and color out there.

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