Cassidy Turley: CRE Recovery to Accelerate in 2012

What has been a slow but steady rebound of the commercial real estate industry is on track to pick up pace in 2012, according to a new forecast by commercial real estate services firm Cassidy Turley.

February 21, 2012
By Barbra Murray, Contributing Editor

Image courtesy Flickr user USACE Europe District

What has been a slow but steady rebound of the commercial real estate industry is on track to pick up pace in 2012, according to a new forecast by commercial real estate services firm Cassidy Turley. Any number of surprises or sudden changes could alter the course, but as it currently stands, such factors as positive national economic data and the increasing number of newly created jobs point to a speedier recovery.

Few anticipated such a rosy forecast. “Five months ago the expectation was slow growth in the U.S economy, with the real possibility of no growth,” Kevin J. Thorpe, chief economist with Cassidy Turley, told Commercial Property Executive. “Under that backdrop, leasing fundamentals would have seen only marginal improvement. With the recent upbeat data, assuming it holds, fundamentals will improve must faster than initially projected, meaning faster declines in vacancy, faster movement towards rent growth, a stronger outlook that many half-leased buildings will be leased up in 2012.”

The numbers tell the story. The Dow’s REIT Index is up from 179 in December 2011 to 191 in January and the total of new jobs created has changed drastically within less than a year. In May 2011, new jobs totaled 54,000 and in January, they totaled 243,000. Those new positions had quite a nice indirect impact on various commercial real estate sectors. Approximately 70,000 of the new jobs were in the professional and business services, which was good news for the office sector, while the industrial and retail markets were aided by the 50,000 manufacturing jobs and the 10,500 retail trade sector jobs, respectively.

Last year, it was the rather superb performance of the industrial market that caught the industry by surprise. “The manufacturing sector is on a tear and suddenly demand for industrial warehouse space is back to pre-recession levels,” Thorpe said. “Very few, if any, would have predicted that the manufacturing sector would be one of the brightest spots in the U.S. economy. The low value of U.S. dollar, surging exports, auto-driven growth, advanced manufacturing growth, overseas jobs returning to the U.S., and now an uptick in residential construction — the stars continue to align for the industrial sector.”

This year, all sectors will benefit this year from the 2.6 percent increase in U.S. real GDP that economists have predicted. The jump will spur the creation of roughly 1.8 million new jobs, which, in turn, will increase demand for commercial real estate accommodations. Cassidy Turley estimates that the new jobs will translate into an average 50 basis points drop in vacancy rates. Office properties will benefit the most, with a drop of 90 basis points. Industrial will likely experience a decline of 60 basis points and retail will see vacancy rates wane 10 basis points. The multifamily sector will remain on top with an anticipated 130 basis points plunge. Further bolstering the outlook is the fact that new development in most sectors is trailing approximately two-thirds behind the historical trend.

The outlook is bright, but not blinding to commercial real estate industry players; the threat of over confidence in the near future is slim, Thorpe believes. “Commercial real estate always gets too comfortable eventually, and it invariably overbuilds,” he noted. “But is that occurring right now? No. The industry is nowhere near that point in the cycle. New construction is razor thin, lending conditions are still tight and developers are still exercising extreme caution.”