“The structures that we design, build, lease, and sell are simply empty vessels into which we put economic activity,” said Craig Thomas, vice president of research for AvalonBay Communities, Inc., addressing the ULI Washington Real Estate Trends conference in Washington, D.C. on April 17. “To understand the performance of assets, you need to understand ‘the econosphere.’ ”
“The Econosphere,” according to Thomas’s book of the same name, is a way of viewing the economy as a combination of traditional economic indicators and the social environment. Unlike standard economic models, the “econosphere” incorporates the notion of human capital and has four laws:
- The law of growth: Each new person brings new wealth to the world.
- The law of information: No matter what the problem, better information is always part of the solution.
- The law of sustainability: Bounty comes from people and nothing else.
- The law of plenty: The economy never takes from one person to give to another; it is never a zero sum game.
“The econosphere is a self-sustaining system that will repair itself if left reasonably unfettered,” Thomas said. “Business flexibility in the face of crisis, for example, is the reason why our economy is now expanding.” In the U.S., the private sector has added over 2.1 million new jobs since the recession’s nadir, he noted, despite riots in Greece, tsunamis, and other factors destabilizing the world economy. Another two million jobs are expected to be added in the next year. The economy is now just shy of 79 percent capacity utilization—80 percent is the turning point at which businesses can pass on costs to customers.
The downside to these optimistic statistics, Thomas said, is that although the economy is larger than it was before the recession, companies have been investing more in technology than in people. There is still a deficit of some 6 million jobs — a fact that will impact the fortunes of office building owners and developers.
While business has adjusted to the new reality, so have households, acting in their best interests and fixing their own balance sheets. Personal debt as a percentage of disposable income is down from 14 percent to about 10.5 percent, a level not seen since the early 1990s. More people are leaving jobs voluntarily rather than being laid off. Workers are moving to where they can be more productive. In 2008, for example, Phoenix experienced net in-migration, while Washington, D.C., has been the winner more recently. Allowing people to act in their own best interests helps explain the economic success of China and India, Thomas said.
But while corporate profits are up, personal debt is down, and state and local governments have made wrenching budget cuts. There is one part of the economy that has not yet been adjusted, Thomas noted—the federal government’s public debt. Federal spending is set to slow down, and that will have an impact on the economy of the nation’s capital, where the rate of federal spending is closely tied to local employment, net office space absorption, and even apartment rent growth.
So how can workers, families, and real estate entrepreneurs prosper in the post-recession economy? Thomas pointed to the econosphere’s “law of information.” He said, “Use information to solve your problems. You cannot improve the market, but you can improve your own information.”
“Be a price hugger,” Thomas advised. ”Pay close attention to the price signal, because that is how the econosphere communicates with us. You don’t need to outrun the bear – just outrun yourself.”