The return of economic growth stimulates Commercial Real Estate Activity, but will it last?
We are at the 2010 halfway mark, the Euro crisis and the phase-out of economic stimulus programs are contributing to serious fears of a double-dip recession.
Yet several economic indicators suggest that the year has also ushered in the first stages of recovery for the U.S economy and the Commercial Real Estate Industry.
Job Growth, the SINGLE-greatest driver of demand for office space and a critical ingredient in fueling demand for other property types, resumed in January after a two-year hiatus. Of the 982,000 jobs created in the first five months of the year, 495,000 were in the private sector. That only begins to chip away at the 8.4 million jobs lost since employment peaked in December 2007, but its a move in the right direction.
Meanwhile, the paralysis in the credit markets that had all but shut down transaction activity is easing. Commercial and multifamily mortgage origination volume in the first quarter of 2010 was 12% higher than the same period a year earlier and 26% higher than the fourth quarter of 2009, according to the Mortgage Bankers Association (MBA).
Stabilization in the credit markets has enabled the velocity of U.S. Commercial Real Estate Sales to accelerate. Transaction volume across commercial property types totaled $15.3 billion in the first quarter, up 48% from $10.5 billion a year earlier, according to Real Capital Analytics, which tracks deals of $5 million or more.
Consumer Spending is showing a surprising rally after declining throughout 2008 and the first half of 2009. Personal consumption spending grew at an annualized rate of 3.5% in the first quarter and contributed more than any other category to a 3% annualized growth rate in Gross Domestic Product (GDP) . Lastly, Corporate America is spending some of its hoarded cash after deep payroll cutbacks. Investment in equipment and software rose 12.7% on an annualized basis in the first quarter following decreases of $13.7 billion in the fourth quarter and $141.4 billion in the third. ” We expect investment in business technology, equipment and software to continue to grow,” says Ben Breslau, director of research for Chicago-based brokerage Jones Lang La Salle. “That’s good for those sectors and is a leading indicator that business is coming out of hibernation and beginning to invest and think about the future.”
Ready To Commit
Indeed, leasing activity is up in most markets. Excluding renewals, office leasing rose 10% in Philadelphia and 30% in Boston in the first five months of 2010 compared with the same period a year earlier, according to Colliers International in Los Angeles, the 16.9% sq. ft.of industrial space leased in January through May this year was 13% more than the 14.9 million sq. ft leased a year earlier.
That marks a sea change from 2008 and 2009, according to Ross Moore, chief economist at Seattle-based Colliers. amid the economic uncertainty of the last two years, tenants across all commercial property types were more likely to request short term extensions when their leases matured rather than commit to a space. “Things aren’t booming,” he says, “but it’s a modest pickup and companies are more willing now to sign on the dotted line.”
The Recovery is fragile. Most economists expect the GDP to grow by 3% or less in 2010 with lingering high unemployment . But the key indicators are slowly moving into the positive column….will it continue?
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