Leading Indicator Shows Decline in Commercial Real Estate is Slowing

Commercial real estate activity has suffered from a severe credit crunch for commercial sectors, sustained job losses and weak consumer spending, although the decline appears to be slowing. A forward-looking indicator shows commercial real estate will remain weak into 2010, but recent actions by the Federal Reserve should improve some flow of capital into commercial lending, according to the National Association of Realtors (NAR).

The Commercial Leading Indicator for Brokerage Activity declined 1.3% to a reading of 101.5 in the second quarter from a downwardly revised reading of 102.8 in the first quarter. It is 13.7% below the 117.6 recorded in the second quarter of 2008. The index is at the lowest level since the first quarter of 1994; NAR’s track of the commercial leading indicator dates back to 1990.

The index is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate and is based on a series of 13 quarterly data components such as industrial production, the REIT Price Index and the NCREIF Total Return index.

Lawrence Yun, NAR chief economist, noted the pace of decline moderated, but the leading indicator has fallen sharply and quickly from the peak, suggesting much lower business opportunities for commercial real estate practitioners engaged in leasing, sales and property management. “The reduction in commercial real estate activity is expected at least through the first quarter of 2010. Any meaningful recovery is not likely to occur before the second half of next year.”

The decline is driven by falling industrial production, far fewer jobs requiring office and retail space, a fall in durable goods shipments, much lower personal spending, lower retail and wholesale sales and a negative return on commercial investment.

“With the economic recession likely coming to an end within six months, a recovery in commercial real estate may soon follow,” Yun said. “The office sector requires job growth to fuel the demand for additional space, the industrial sector needs a rise in production and the retail sector is tied to consumer spending. Multifamily housing — the apartment market — often performs in reverse to trends in home sales, but can improve if there is sufficient household growth.”

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