Leading Commercial Real Estate Index Contracts in First Quarter

WASHINGTON, May 21, 2008

Although fundamentals are sound, activity in commercial real estate markets is expected to ease in the months ahead, according to a forward-looking index for the commercial real estate sectors published by the National Association of Realtors^®.

The Commercial Leading Indicator for Brokerage Activity¹ edged down 0.7 percent to an index of 119.0 in the first quarter from a downwardly revised reading of 119.9 in the fourth quarter, and is 0.8 percent below the first quarter of 2007 when it stood at 120.0.

This is the third consecutive quarterly dip since reaching a record of 120.5 in the second quarter of 2007. Before that, the index showed generally positive expansion from the middle of 2003; NAR’s track of the index dates back to 1990.

Lawrence Yun, NAR chief economist, expects somewhat diminished business opportunities for commercial real estate practitioners in the months ahead. “The moderate erosion in the index suggests that commercial activity, as measured by net absorption and the completion of new commercial buildings, will be positive but somewhat weaker over the next six to nine months. Private nonresidential investment in structures is likely to subtract one-third to one-half percentage point off GDP growth,” he said. “Along with the impact of the credit crunch, a weakening in leasing and building sales activity should come as no surprise because commercial real estate follows changes in overall economic activity.”

The quarterly decline results from falling employment in the sectors requiring office space, rising first-time unemployment claims, a lower rate of return as measured by NCREIF (National Council of Real Estate Investment Fiduciaries), and a falling NAREIT (National Association of Real Estate Investment Trust) price index. In addition, there was a modest decline in industrial production.

Realtors^® members who specialize in office and industrial properties indicate in a separate attitudinal survey² that they anticipate a much lower level of business activity in the upcoming quarters.

“The job market is weak, but not recessionary,” Yun said. “There are large regional variations, with job growth in the South, while overall professional business service jobs are in the process of a long-term expansion.

“The U.S. is the world leader in the knowledge-based industry, and trade exports are solid – combined, these are solid underlying fundamentals for positive rent growth and net absorption in the commercial real estate market.”

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 price index, NCREIF 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.

More than 80,000 NAR members offer commercial services, and 60,000 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 1.2 million members involved in all aspects of the residential and commercial real estate industries.

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¹The index was revised minimally back through 2005 due to a comprehensive revision in industrial production data by the U.S. Census Bureau.

NAR reviewed a wide variety of indicators, examined the relationships of indicators that demonstrated a historical impact on commercial real estate, and modeled a forward-looking index based on historic trends. Although individual indicators sometimes move in opposite directions, together they offer a better indication of future market activity.

Quarterly data for 13 selected series were reviewed back through the first quarter of 1990. The modeling demonstrated a change in commercial brokerage activity that could be seen two quarters later as measured by net absorption in the industrial and office sectors, and the completion of new commercial buildings as measured by the value of building construction put-in-place of office, warehouse, retail and lodging structures. An index of 100 is defined as the level of commercial real estate market activity during the first quarter of 1990, the first period to be analyzed.

²The SIOR Commercial Real Estate Index is a diffusion index based on a survey of approximately 600 members of the Society of Industrial and Office Realtors^® conducted by NAR Research. For more information, contact Richard Hollander, SIOR, at 202/449-8200. Click here for Commercial Leading Indicator Index.

The next commercial real estate market report and forecast is scheduled for release on June 18, and the next commercial leading indicator index will be released August 20.