WASHINGTON, D.C. – "Truth is the first casualty of war," U.S. Sen. Hiram Johnson (R-Calif.) opined in a 1918 speech.
        Human life, of course, is unquestionably war's most tragic casualty – and it's a topic foremost in many minds as the United States, with or without its allies, seems to edge ever closer to a large-scale confrontation with Iraq.
        Compared with human life itself, then, economic concerns pale to a whiter shade of albino. But the economy, too, feels war's impact, pro or con. And a Gulf War's economic impact on real estate is, unavoidably, in the thoughts of many in the industry.
        But divining that impact – much less the Iraq dilemma's eventual resolution – seems the slippery stuff of hit-or-miss fortunetelling.
        Nonetheless, the Center for Strategic and International Studies (CSIS at www.csis.com) has waded into the fray, looking at a war's potential impact on U.S. commercial real estate. The Washington, D.C.-based think tank has released "research scenario planning" on the commercial real estate impact of a range of Iraqi conflict resolutions.
        CSIS's gamut of potential commercial real estate impacts (excepting the "no-war" option, which would have no impact) is significantly broad. Ranging from "no war" to a "worst-case scenario," those outcomes could lead to everything from a short-term speedup in economic growth to a full-blown recession.
        Here's a brief look at CSIS's findings.

'Benign' War Would Be 'Short-Term Boost'

Any Iraqi contest is subject to "critical uncertainties," CSIS researchers said, including "the duration and intensity of the war, disruptions to oil supply and the likelihood of related terrorist attacks in the U.S. and among its allies."

"A protracted conflict in Iraq would be the biggest risk" to economic growth during 2003 said Tim O'Neill, NABE president and BMO Financial Group chief economist.

        A nonpartisan think tank founded in 1975, CSIS lists probabilities for the various outcomes its newly released research outlines.
        The most likely conclusion, CSIS said, is a "benign war," the probability of which it lists as 40 percent to 60 percent. Researchers defined "benign war" as "a quick, decisive U.S. victory within four to six weeks, with no damage to oil supply capabilities and no serious terrorist attacks."
        With that outcome, "the effect on the U.S. economy is limited," CSIS said. "The best-case scenario could create a short-term boost for the U.S. economy, which should filter through to the global economy." The "benign war's" economic boost would be powered by increased U.S. government spending and the removal of "the prevailing uncertainty about the war and . . . how adverse its effects might be," CSIS said.
        A "benign" conflict would also rally U.S. equity markets, CSIS researchers said. U.S. inflation, on the other hand, "will rise briefly" due to oil-price increases, they said, but will then rapidly decline.

Possibilities Very Broad Also for Real Estate Investors

On the other hand, the research's "worst-case scenario" would have a more dire impact on the economy – and on commercial real estate.
        Given a 5 percent to 10 percent chance of occurring, that worst case is defined by CSIS as "intense urban warfare, an armed conflict that could last between three and six months." That outcome would include Iraqi attacks "on oil facilities in the region with weapons of mass destruction and significant damage," CSIS reported. "The region will experience massive political unrest and terrorist attacks will intensify."
        "If the worst-case scenario eventuates," CSIS researchers concluded, "a global recession is unavoidable."
        That protracted clash would slow U.S. economic growth to a rate 4.5 percent lower than in the "no-war" scenario, CSIS projected. Similarly, a worst-case conflict would increase U.S. unemployment to 7.5 percent, the research predicted.
        That broad variety of economic outcomes in the CSIS research similarly leaves commercial real estate investors with a wide array of possibilities. The breadth of that range, in fact, may appear daunting to some.
        "In the worst-case scenario, investing in real estate during early 2003 could be tantamount to investing in a declining market heading for a recession," CSIS researchers concluded. "In the-best case scenario, investing in real estate at this time could be heralded as clever buying at the bottom of the market."

NABE Survey: 'Protracted Conflict
Biggest Risk' to 2003 Economic Performance

Recent research also indicates that corporate real estate expansion is generally being stanched by uncertainties over the Iraq situation.
        U.S. industrial production fell by 0.6 percent during 2002, according to the Federal Reserve. That performance was an improvement from 2001's 3.5-percent industrial production decline. Still, 2001-02's back-to-back drop marks the first two consecutive years of decline since the 1974-75 recession.

"A protracted conflict in Iraq would be the biggest risk" to economic growth during 2003 said Tim O'Neill, NABE president and BMO Financial Group chief economist.

        And uncertainties over the Iraqi outcome in Iraq are continuing to fuel business uncertainties over increasing hiring and capital spending, according to a recent survey by the National Association for Business Economics (NABE at www.nabe.com).
        "Despite modest improvement in profit margins, firms remain cautious about both hiring and capital spending," Tim O'Neill, NABE president and BMO Financial Group chief economist, said of the survey, which queried 102 businesses.
        "The NABE panelists expect around a 2 percent to 3 percent growth rate for the first half of 2003," O'Neill added. "The results constitute a tale of two economies: Investment and employment shrinking in the goods-producing and transportation-utilities-communications economy, while expanding in the finance and services-producing economy."
        "The biggest risk to performance in 2003," O'Neill concluded, "would be a protracted conflict in Iraq."
        For real estate, then – as for the world as a whole – the Iraq situation is not dramatically different from a recent observation by United Nations chief weapons inspector Hans Blix.
        "The situation," Blix said, "is very tense and very dangerous."