Start-ups and new businesses are extremely important for job creation and employment growth. The strength of the economic recovery depends on the rate of new business formation and the employment gains from these start-ups. Real estate is the primary asset for many small businesses and the collapse of residential and commercial property values devastated their balance sheets. Declining real estate values have also reduced the net worth of entrepreneurs and likely slowed the rate of small business creation.
The latest Federal Reserve’s Flow of Funds Report, which was released last week, indicates that real estate is a substantial component of the assets of non-corporate non-financial businesses. In 2007, prior to the collapse of real estate property values, the market value of real estate accounted for
- 69% of the assets of non-corporate businesses
- 33% of the assets of corporate businesses
Moreover, residential real estate accounted for the majority of the real estate holdings by non-corporate businesses and 41% of all assets of these businesses.
The sharp decline in residential and commercial real estate values during the Great Recession had an enormous impact on the balance sheets of non-corporate businesses. The plunge in real estate prices accounted for 99.9% of the decline in the value of their assets between 2007 and 2009. The value of real estate owned by non-corporate businesses has increased since 2009, but for each $8 decline in property values there has been only $3 in gains between 2009 and the end of 2011. The recession has taken its toll on small businesses; the asset value of all non-corporate businesses is 10% below the pre-recession level, while corporate businesses are worth more than in 2007.
The decline in real estate property values devastated the balance sheets of small businesses and probably reduced the rate of new business formation and job creation. The latest Federal Reserve data indicates that corporate businesses are worth more than they were prior to the downturn, while non-corporate businesses have declined in value. Real estate is the primary asset for most small and new businesses, which account for much of new job creation. Depressed real estate values remain a drag on small businesses. Small and new businesses will not be an engine of growth until residential and commercial real estate values recover.