Why We Won’t Have a Double Dip (It’s Not What You Think)

One of the nice things about blogging, I’ve discovered, is that the author is allowed to be a little more opinionated than in a regular research report, which is my stock-in-trade. So permit me to talk about why I don’t think we’ll have a double-dip recession. I’m not going to cite the usual statistics – job growth, retail sales, industrial production and the like. Instead, I’m going to cite what’s happening in commercial real estate. Our industry is a lagging indicator – no doubt about it. On the demand side, tenants don’t usually lease space until they hire new employees, and the labor market lags the broader economy. This makes commercial real estate a double lagging indicator, twice removed from the current action. On the supply side, the construction pipeline continues to deliver space for months and years after the end of a recession. Now that’s a lag. Nevertheless, I contend that second-quarter leasing market statistics for the four core property types – apartment, industrial, office and retail – have something to tell us about the direction of the economy.

The leasing market is either close to bottoming out, has bottomed out or has already moved off the bottom. The apartment vacancy rate fell by 20 basis points in the second quarter (two-tenths of a percentage point), from 8.0 to 7.8 percent (Reis). Data from the Census Bureau confirms that the vacancy rate for rental housing is falling. For shopping centers and retail properties, Reis reports an increase of 10 basis points in the second quarter while CoStar says the vacancy rate fell by 10 basis points – so call it a wash. Grubb & Ellis data indicate that the office vacancy rate rose by 10 basis points to 18.0 percent while preliminary results show the industrial vacancy rate unchanged from the first quarter at 10.9 percent. The increases have either ended or are petering out, suggesting that the softening cycle is spent.

What does this tell us about the future trajectory of the recovery? It says that the recovery is likely to continue – no double-dip. Tenants are planning ahead, getting off the fence, signing leases – in some cases long-term leases – to secure space. They are not climbing back on the fence. They are reinstating space searches that were suspended in the depths of the recession, feeling confident enough in their own revenue projections to move forward. This is not the same as confidence in a strong recovery. They believe that they know how to operate in the context of a weak recovery. The same dynamic is propelling the commercial real estate investment market. Capital is coming off the sidelines and is bidding up prices for core properties in primary markets – the cream of the crop. This wouldn’t be happening if investors thought we were heading into another recession.

And, really, the slow recovery should come as no surprise to anyone. Since late last year most analysts have been projecting a slow recovery. We had a modest acceleration late in 2009 and in the first quarter of this year that raised peoples’ expectations, but it was followed by a modest deceleration in the second quarter that lowered expectations. Average it out and what do you get? You get a slow recovery. For commercial real estate, the operative word is recovery. Tenants and investors are behaving like the recovery will continue, and I think that’s somewhat of a leading indicator.

One Response to “Why We Won’t Have a Double Dip (It’s Not What You Think)”

  1. greg Says:

    On a related note – do you have any opinion on US demographic information as a means of forecasting commercial real estate trends? For example, take the average age at which most americans retire minus the average age at which point most enter the workforce at plot the result based on US birth rates. The result may suggest that commercial real estate performance would be in a downward trend for awhile as baby boomers exit the workforce or move to consultative rolls and are slowly replaced by the so-called echo boomers. Any thoughts?

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