Commercial Real Estate to Retain Favorable Position in Down Market

More pain is in store for the U.S. economy in the coming months, but the commercial real estate market is generally expected to endure less of it, according to economists speaking at the National Association of Real Estate Editors 42nd annual real estate journalism conference in Dallas this morning.James Gaines, research economist for the Real Estate Center at Texas A&M University, anticipates a significant need for the federal government to bail out banks and other financial institutions to avoid insolvency due to involvement in commercial debt obligations, mortgage-backed securities and mortgage-backed paper—largely relating to the single-family housing market–purchased in the past several years. He also predicted a version of stagflation in 2008 and 2009, with high inflation, low economic growth and job losses–but without the high interest rates of previous such periods. And while much has been made of the subprime market and credit crunch, he noted that a looming problem is related to the $40 trillion industry for credit default swaps based on the single-family housing market. His advice: Expect the unexpected during the next 12 to 18 months.Jeanette Rice, though, expects the weak economy to remain relatively mild, although it is likely to continue into 2009 and could still become much worse before it turns around. The vice president of market & investment research for Verde Realty, however, noted that performance will vary both geographically and by property type, based on industry-specific performance. Those locations and property sectors more influenced by housing, manufacturing and finance will undergo the greatest difficulties, while aviation and retail will cause weakness and commercial real estate, technology, government and tourism will all undergo moderate difficulties and the healthcare, agriculture and energy sectors will remain robust. More specifically, she listed Seattle, Houston and the Great Plains as strong locations due to their respective dependence on technology and aerospace, energy and agriculture, while Phoenix, California’s Inland Empire and Detroit will be laggards. All that said, the impact of financial market pain will be extensive, she emphasized, with many more jobs to be lost and a consequent impact on the office sector. The industrial sector will feel a more immediate but less extensive influence from other affected industries, while retail remains a house of cards. The multi-familly sector, meanwhile, should continue to perform well unless the economic downturn proves to be deep and extended, according to Mark Obrinsky, chief economist & vice president of research for the National Multi Housing Council. Data for apartment completions, he noted, has been inflated by figures for condominiums, furnished apartments and other categories and actually amount to only half the number that have been permitted, at 181,000 between 1997 and 2006 versus 350,000 permits, making for relatively controlled growth. Vacancy rates remain low, while net absorption has been positive. And expected growth in the Echo Boomer and immigrant populations should bode well for apartment rentals. Larger trends will continue to influence the commercial real estate as well as other industries, but Rice predicted globalization may slow down as a number of economies lose steam, with inflation in China leading to a permanent increase in prices for consumer goods and increased U.S. investment overseas. The weak U.S. economy will temporarily slow urban development as well.