Fourth Quarter Commercial
Real Estate Index Eases
WASHINGTON February 20 2008

The Commercial Leading Indicator for Brokerage Activity slipped 0.4 percent to an index of 120.1 in the fourth quarter from a reading of 120.6 in the third quarter but remains 0.1 above the fourth quarter of 2006 when it stood at 119.9. This is the second straight quarterly dip after reaching a record of 1207 in the second quarter of 2007. The index showed nine consecutive quarterly gains prior to these declines; NAR’s track of the index dates back to 1990.

Lawrence Yun NAR chief economist said the latest index suggests reduced business opportunities for commercial real estate practitioners in the months ahead. “The decline in the index implies that commercial activity as measured by net absorption and the completion of new commercial buildings is likely to contract moderately over the next six to nine months which is consistent with an expectation for slower overall economic expansion in upcoming quarters ” Yun said.

Rising unemployment insurance claims and falling durable goods shipments were the key factors in lowering the CLI but a weaker rate of return on investment as measured by the NAREIT Price Index was also a factor. The only positive contributors to the index were growth in wholesale and retail trade and rising personal income. “The latest data imply that investment in private nonresidential structures which rose a solid 13.2 percent in 2007 according to a preliminary GDP estimate could show only minimal growth or even decline in 2008 ” Yun said.

“Realtor® members who specialize in office and industrial properties indicate in a separate survey that they anticipate a measurably lower level of business activity in the upcoming quarters.”The Commercial Leading Indicator implies weakening activity for commercial leasing and building sales activity. “Commercial practitioners can anticipate a weaker though positive net absorption in the office and industrial sectors later in the year with fewer new commercial buildings reaching the market ” Yun added.

The commercial leading indicator is a tool to assess market behavior in the major commercial real estate sectors. The index incorporates 13 variables that reflect future commercial real estate activity weighted appropriately to produce a single indicator of future market performance and is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate. The 13 series in the index are industrial production the NAREIT (National Association of Real Estate Investment Trust) price index NCREIF (National Council of Real Estate Investment Fiduciaries) total return personal income minus transfer payments jobs in financial activities jobs in professional business service jobs in temporary help jobs in retail trade jobs in wholesale trade initial claims for unemployment insurance manufacturers’ durable goods shipment wholesale merchant sales and retail sales and food service. Nearly 140 000 NAR members offer commercial services and 73 000 of those are currently members of the Realtors® Commercial Alliance NAR’s commercial division.

The National Association of Realtors® “The Voice for Real Estate ” is America’s largest trade association representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.

According to Dr. Jay Q. Butler Director of Real Estate Studies at ASU for the last 35 years the Metro Phoenix market has already pretty much rebounded. It is now 31st on the list for median homes price which is still below other non-coastal growth cities like Las Vegas Reno and Denver. Although the number of listings should be more in the 35 000 to 37 000 unit range (not 50 000 plus) resale homes sold in the 4000-5000 units range the last couple of months and we are still moving homes at historic norms.

Homes that are in close transport areas in Phoenix, Scottsdale , Glendale , Tempe, Mesa, etc are rebounding much better than outlying areas like Pinal County and the Far West Valley. We have seen an increase in number of remodeling permits for older homes making them more attractive to buyers in terms of value. Families that have historically used the equity in their homes to support their lifestyles are tightening their belts causing a decline in the retail markets. bit this is not necessarily bad news for the housing market. On the contrary it could be extremely good news for the mortgage industry as the feds will more than likely lower interest rates to stimulate the economy.

The message is keep plugging along. Everything in this industry in cyclical and will eventually rebound. It’s just a matter of sellers realizing what they need to do to sell their homes (IE: lower price remodel landscape etc.) The buyers are still there and there are still plenty of no down and low down payment owner-occupied programs available to them. But the buyer has to see the value in making the purchase. If it costs them twice as much to own versus rent then they’ll be more inclined to continue renting.