How Will The Economic Slowdown Affect Commercial Real Estate Fundamentals?

Posted on September 14, 2011

Volatility continued to haunt financial markets in late August through early September, and fear of a double-dip recession remains prevalent.

Even if economy does not contract sharply, how would slow growth affect the near-term prospects of commercial real estate fundamentals?

Fortunately, we already have evidence of how various property types will fare through a slow economic recovery.

The latest figures from Aug. 26 show that U.S. GDP grew by only 1% in the second quarter on an annualized basis, implying that the economy crept forward at a decidedly unhurried pace of 0.7% in the first half of 2011.

Job growth was flat in August, netting out to a paltry monthly average of 109,000 net jobs created year to date.

The U.S. economy needs to grow at an annualized rate of at least 2.5%, and produce around 200,000 jobs per month, for the unemployment rate to even begin falling.

It’s been more than two years since the recession ended, so we already have ample evidence of how commercial properties will perform through a tough slog.

ASSESSING REAL ESTATE FUNDAMENTALS

The latest monthly data show that recovery in commercial real estate fundamentals remains mixed. Retail properties continued to lose occupied space, albeit at a measured pace compared to the hemorrhage back in 2009.

Vacancies for neighborhood and community centers hit 11% in July, just 10 basis points shy of the record high observed in 1990.

Effective rents deflated slowly, falling by 0.1% year to date through July, but it stands in marked contrast to the nascent recovery of the office sector.

Office properties notched another small gain in July, with vacancies dipping by 10 basis points to 17.4%. Occupied space has increased by 12.6 million sq. ft. since the start of the year, and effective rents have risen at a modest but consistent pace in each of the past seven months, growing by 1% through July.

The multifamily sector remains the best performer, with vacancies cratering by 80 basis points to 5.8% in July. Directly benefiting from the ongoing travails of the housing market, rental properties notched a healthy 1.4% gain in effective rents over the last seven months.

By Victor Calanog, National Real Estate Investor