Challenges Remain for Commercial Real Estate

May 17, 2013

Even as the stock market rises and jobs return, commercial real estate in the United States faces a range of challenges, said NAR Chief Economist Lawrence Yun and several participants in the Commercial Economic Issues & Trends Forum Thursday afternoon at the 2013 Midyear Legislative Meetings & Trade Expo in Washington, D.C.

Yun said commercial real estate was an "innocent bystander" that suffered "collateral damage" caused by the financial and housing crises in the latter half of the previous decade. Typically, the sector lags the general economy by 18-24 months, and recent growth would seem to bode well for the future of commercial real estate.

However, overall economic improvement has been uneven. While optimism among the wealthy has been buoyed by increases in their stock portfolios, low-income Americans—who are still underemployed and often have no investments—believe the economy is not improving and could be getting worse, Yun said.

Confidence among commercial practitioners at the forum regarding their industry was similarly uneven. Electronic polling of the hundreds of attendees in the session showed the following:

  • Fifty-three percent thought commercial real estate had marginally improved from a year ago. Twenty-one percent said it had experienced a big improvement, and 21 percent said it had remained about the same.
  • Fifty-eight percent expect it will get a little better in 2014.
  • Twenty percent expected a big improvement and 20 percent predicted it would remain the same.

Yun cited research from Real Capital Analytics that showed commercial real estate investments globally rose 4 percent year-over-year. Yet the industrial, office, and retail sectors are practically stagnant right now. A strong performance in multifamily is essentially the only driver of overall commercial growth. A truly robust recovery in commercial real estate would show growth across all of those categories.

One issue that's holding a full commercial recovery back is the decline of smaller financial institutions. Big banks now have more than half of total deposits, compared with about a third of all deposits in 2000, Yun said. But commercial REALTORS® have traditionally relied on regional and community banks and credit unions to finance deals, NAR Research shows. If too-big-to-fail institutions get bigger, the capital available to finance commercial transactions, particularly at the lower end of the market, will be harder to come by. (Incidentally, 70 percent of REALTORS® most recent commercial transactions were $1 million or less, according to NAR Research.)

Additionally, inflation could pose a future challenge. Right now, the Consumer Price Index shows inflation at less than 2 percent annually. However, the Federal Reserve's quantitative easing programs and the government's attempts to finance large budget deficits without raising taxes will likely produce inflation ranging between 4 and 6 percent by 2015, Yun said.

—Brian Summerfield, REALTOR® Magazine

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An Uneven Commercial Recovery