Commercial Real Estate Follows Economy Into Recovery

May 18, 2012

In his remarks yesterday at the Commercial Business Trends Forum during the Midyear Legislative Meetings & Trade Expo in Washington, D.C., NAR Chief Economist Lawrence Yun sounded a cautiously optimistic note regarding the state of the commercial real estate market.

That’s because the commercial sector is so closely tied to the overall economy, which has been looking up over the past year in many respects. Specifically, the stock market has regained nearly all the losses it took in late 2008 and early 2009, Yun said. Also, corporations are sitting on large cash reserves, and are now looking for ways to invest that productively.

"The commercial market follows the broader economy with a lag time of 12 to 24 months," he explained. "Statistically, we're out of the recession. The economy's been improving since late 2009, almost three years of uninterrupted growth. Now, consumers are opening up their wallets and beginning to spend more."

Commercial real estate should pick up even more as businesses continue to grow and hire, Yun said. However, a few significant challenges remain. The possibility of a default by Greece, as well as the states of Illinois and California, looms over the financial markets. Additionally, while the jobs picture has improved somewhat, the unemployment rate will remain high for the foreseeable future.

Within commercial real estate, financing also remains a problem. Last year was a tough one to obtain commercial mortgages, and so far 2012 has been too, particularly for smaller-scale companies, Yun said. "Bigger players have gotten bigger, smaller players have gotten shut out," he explained.

In his rundown of commercial subsectors, Yun said multifamily and office are bright spots, with rising leasing costs and falling vacancies, and New York and Washington, D.C. are the strongest markets, respectively, for those categories. Industrial and retail are improving as well, but the turnaround in those areas has been slower.

— Brian Summerfield, REALTOR® Magazine