Economic Troubles to Catch Up with Commercial Real Estate in 2009

Analysts predict more trouble ahead for the commercial real estate industry as the U.S. economy continues to contract this year and a global recession sets in.

One major factor that will contribute to the negative performance of the U.S. economy is that consumer spending, which accounts for about 70% of the nation’s gross domestic product (GDP), is now in retrenchment mode since consumers are feeling less wealthy as home prices decline.

Speaking at a Dow Jones media briefing on the global economic outlook, Christian Menegatti, managing editor and lead analyst with economics blog, said RGE expects the U.S. economy to contract by 3.4% in 2009. “The U.S. economy is in the middle of the longest and most severe recession in the last 50 years. We expect U.S. GDP will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last around two years,” according to Menegatti.

Housing market problems came to the forefront in 2006 and the U.S recession is now said to have begun in December of 2007. But troubles in the economy have caught up with commercial real estate after an expected lag of about two years. RGE believes that the sector is poised for a 25% fall in prices, accompanied by a 17% increase in commercial real estate loan delinquency and default rates.

The U.S. economy’s troubles started off in the housing sector in 2006, and spread to the financial sector last year. The housing sector has yet to bottom out.

RGE expects that home prices will fall as much as 38% in this cycle and they have only fallen 25% from peak levels so far. There is even a chance that home prices will fall as much as 44% in case there is an overcorrection. The excess supply of homes is roughly 1 million units and this will have to be worked through.

On the employment front, Menegatti projects monthly job losses to range from 400,000 to 600,000 in the first two quarters of 2009. These losses will push up the U.S. unemployment rate to 8% by the summer and then peak at about 10% in the first quarter of 2010.

Considering that the U.S. economy is now based more on service than manufacturing, job losses are likely to impact service-oriented industries such as the retail and hospitality sectors more than some others.

While stimulus from the government, says Menegatti, in the form of action by the Federal Reserve and the U.S. administration, will make the recession less severe than it might have been, the contraction on the economic front is still likely to go on for another year.

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