Commercial Market Good, Not Great

Despite estimates from NAR’s Commercial Leading Indictor that commercial activity will continue to slow over the next six months, fundamentals remain strong for most property types, NAR Chief Economist Lawrence Yun said at the 2008 NAR Midyear Legislative Meetings & Trade Expo Thursday.

“Most commercial markets will be sluggish, but positive, this year,” he said. A few, such as Michigan, Ohio, Florida, and Nevada, are ending up in negative territory. Fallout from the residential subprime meltdown has also spilled over to commercial, with transaction volume dropping approximately 50 percent in fourth quarter 2007.

However, as Yun noted, the fortunes of commercial real estate ultimately depend on the strength of the economy. Here, the news is cautiously optimistic. Continued strength in corporate profits, estimated at some $1.5 trillion in third quarter 2007, and expanding exports should offset the impact of falling job growth and keep the economy in the positive column.

Indeed, said Yun, it’s the 1 percentage point that exports have contributed to the GDP in the last quarter that has kept U.S. economic growth in the positive column. “I realize that trade is seen as a source of manufacturing job losses in some areas, but, without exports, the U.S. would be in a recession,” he said.

Job growth is weak in most sectors, with Yun predicting only 1.1 percent growth in 2008. He estimates that unemployment will rise slightly to 5.4 percent this year and increase marginally to 5.6 percent in 2008.

GDP will grow by only 1.4 percent in 2008 but should improve to 2.2 percent annual growth by 2009, predicted Yun. If the Fed begins to tighten interest rates late this year, as he expects, it should help curb inflation, which is running at approximately 4.5 percent when gas and food are factored in, he said.

As might be expected, retail and multifamily are suffering from the inflation-induced drop in consumer confidence. Retail may get a short-term bounce from the tax rebate, but household formations remain very slow, hurting multifamily demand. “There are also a great many single-family homes and condos in the rental pool that aren’t factored into vacancy rates,” noted Yun.

The office market also faces challenges in ’08, with significant new construction coming online and cap rates rising from their currently low 5.3 percent average levels.

Industrial presents a better opportunity for investors because of strong exports and cap rates that have seen increases to an average of 6.6 percent, bringing values down.

— By Mariwyn Evans for REALTOR® magazine online