Hurricane Sandy Likely to Stimulate Economy in Medium Term

Commercial property financing volume has increased by 25 percent in the first few weeks of the fourth quarter, said Sam Chandan, president and chief economist of Chandan Economics.

Concerns about possible higher capital gains tax next year may be causing more investors to sell properties.

According to Sam Chandan, president and chief economist of Chandan Economics, commercial property financing volume has increased by 25 percent in the first few weeks of the fourth quarter compared to the same period in the previous quarter. Most of the increase is composed of financing for property sales, said Chandan.

Acquisition financing is up “very strongly,” added Chandan. He attributed the increase to concerns about higher capital gains taxes in the new year. There is a possibility for moderate or full increase of capital gains taxes to be passed under tax reform or new budget in the new Congress next year.

Chandan was speaking via webcast during a third quarter debt markets briefing this week.

4,200 commercial property financing transactions were tracked by Chandan Economics for the third quarter of 2012. Chandan said there were lower borrowing costs overall, and a slight narrowing of spreads in the third quarter. The most significant trend in the third quarter was the easing in underwriting standards, he said, as measured by increase in loans with initial interest-only and cash-out refinancings. He also noted there are more refinancings occurring before the term is due, and this trend could be attributed to the expectation that interest rates will not fall much further.

Meanwhile, in the apartment sector, financing may be becoming even more aggressive, Chandan suggested. Apartment financing is showing less pricing differences for properties and locations of different quality.

Differences in risks between say, Manhattan, and secondary markets are real, said Chandan. However, he said he is not seeing those differences in risks being reflected in differences in loan pricing and sizing. That risk pricing, he said, has “disappeared” in the third quarter even compared to the second and first quarter.

Meanwhile, regarding the economic effects of Hurricane Sandy, Chandan said early loss estimates are for $40 billion to $60 billion. He said in the short term, the immediate impact is “strong” and there will be a significant decrease in economic activity.

However, in the medium term, as insurance, reconstruction, and aid dollars start flowing into the affected areas, the economic effects of the Hurricane will be stimulative to the economy, noted Chandan. Indeed, the greater the damage to property and infrastructure, the greater the stimulative impacts on the economy. “The higher the initial cost, the more significant the medium-term bump,” he explained.

In the long-term, Hurricane Sandy is not expected to have an effect on the U.S. economy, according to Chandan.