Economist's Commentary: March 10, 2008
Two Different Commercial Indices -- Same Message
By Scott Ian MacIntosh, Senior Economist, Commercial/Investment Real Estate
The Winter SIOR Commercial Real Estate Index, representing data collected in January 2008, compiled by the Society of Industrial and Office Realtors (SIOR) and analyzed by the National Association of Realtors (NAR) posted the steepest quarterly decline since SIOR began its indexation project in late 2005. The national index, which measures 10 variables pertinent to the performance of U.S. industrial and office markets, dropped 11.6 points to a reading of just 95.6 in February 2008.
NAR's Commercial Leading Indicator (CLI), released in mid-February, also indicates that commercial real estate activity is going to decline modestly in the months ahead. The CLI slipped to 120.1 in the fourth quarter of 2007, a drop of 0.4% from the third quarter number. The CLI is a quantitative index derived from 13 selected series of public and private sector data sources going back to 1990.
The SIOR Commercial Real Estate Index is a diffusion index where a score 100 indicates markets in balance. Therefore a score of 95.6 reflects negative conditions in the commercial real estate industry for landlords and sellers. It is clear that the robust market enjoyed until recently has been broken-at least temporarily. Sixty-six percent of survey respondents think the market for spring 2008 would be about the same or worse than year-end 2007 conditions. The index was based on replies from 597 SIOR member expert participants who provided their views on market conditions in their respective markets in early to mid January 2008.
Index results indicated that local economies continued to be strong with only 29 percent citing a weak local economy as the reason for worsening real estate conditions. Compare this with the 64 percent of respondent who indicated that the national economy was having a negative impact of their local real estate market.
The majority of respondents, 54 percent, indicated a balanced market or one where landlord concessions were insignificant. Overall, the investment market was balanced with only a slight uptick in favorable conditions for sellers.
Office Market
The Office Market experienced the most significant Index decrease-dropping 12.9 points to 95.6 from a 4th quarter index number of 108.5 - and below the 100 points that indicate a balanced market. The decrease represented a decline of office leasing and office building sales transactions.
Industrial Market
The Industrial Market Index declined by 12.2 points to rest at 95.1 down from the 107.3 number in the last quarter. The slowdown in industrial is the result of diminishing leasing and sales activity.
The declining Office and Industrial Indexes are to be watched closely even though respondents indicated that local economies were not affected by the national economy. Although the housing market normally fluctuates according the time of year with the spring being the most active, the Industrial and Office markets typically do not fluctuate according to the season.
Regional Breakdown
The South is the only region that still has an SIOR Index over 100. An index of 102 indicates that office and industrial activity in the South is performing better than either the national or the other regional markets. While the index for the South is above 100, it is also down significantly (11.3 points) from the index value seen at the end of 2007.
The biggest decline in the SIOR Index has occurred in the Northeast where it has gone from 107.5 to 94 on a quarter-to-quarter basis. Concerns about the economy and what could happen on Wall Street and the banking community seem to be of paramount concern to commercial practitioners in the Northeast. Although it slipped 10.2 points from the Fall Index, the West ranked just under the 100 benchmark at rested at 98.1. Concerns over the decline in traffic through the ports located in Los Angeles and Long Beach have put somewhat of a damper on the Southern California markets. The fallout from the subprime mortgage fiasco has also impacted Orange County and to a certain extent Seattle, where several mortgage companies were headquartered.
The Mid-West, the only region that continuously tracks below 100, came in at a record low 84.8 this quarter, losing 8.1 points. The Mid-West continues to experience industrial and office difficulties. Markets like Detroit and St. Louis as well as many markets in Ohio could certainly use a boost in the economy. Until that happens, commercial real estate will continue to be sluggish. Chicago continues to be the success story of this region.
It is clear from both of these indices that the commercial real estate is in for a period of slower activity as we move further into 2008.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.
