Halftime Pep Talk
We are at the midpoint of 2010, and the economy and the commercial real estate markets are trudging ahead. It's not a V-shaped recovery, unfortunately, nor does a double-dip recession appear likely - see the chart below showing GDP forecasts from economists at three large financial institutions. Real Capital Analytics says that property sales volume year-to-date through May is 56 percent higher than the same period last year though sales remain low by historic standards. Demand is focused at either end of the quality spectrum - core assets in primary markets or deeply discounted troubled assets. Broad pricing metrics such as cap rates and repeat-sale property indexes have stabilized. Leasing market fundamentals have stabilized for apartments while the office, industrial and retail markets are nearing a bottom.
Early in the year, the economy appeared to be firming rapidly and the stock market surged ahead, so it looked like the recovery would proceed quickly. But in the second quarter Europe swooned, the U.S. economy hit some speed bumps and Wall Street fizzled. When you average it out, we're getting exactly what most analysts expected at the beginning of the year - a gradual recovery.
It doesn't feel like a recovery, but neither did it feel like a recovery in 2002 and 2003 though the prior recession ended in November 2001. Nor did it feel like a recovery in 1992 and 1993 despite the fact that the prior recession ended in March 1991.
One big difference between now and the early 1990s is that today there is plenty of capital chasing commercial real estate or waiting on the sidelines to do so. The industry retains its popularity as an investment asset class, which was not really the case in the early 1990s when word on the street was that the market would not need any new space until after the millennium, a forecast that proved far too pessimistic.
Fear not, readers; though the economy is not roaring ahead, commercial real estate is attracting more investor interest than we could have hoped for a year ago while the leasing market is finding its footing. The recovery is going according to plan.
Compliments of Bob Bach