Decline In CRE Sectors Shows Signs Of Deceleration

Commercial real estate activity remains weak, but the decline appears to be slowing, the National Association of Realtors (NAR) says.

While NAR's forward-looking indicator shows commercial real estate activity will remain low into next year, recent actions by the Federal Reserve – including its extension of the Term Asset-Backed Securities Loan Facility (TALF) – ‘should improve some flow of capital into commercial lending,’ the group suggests.

The Commercial Leading Indicator for Brokerage Activity declined 1.3% to an index of 101.5 in the second quarter from a downwardly revised reading of 102.8 in the first quarter, and is 13.7% below the 117.6 recorded in the second quarter of 2008. Lawrence Yun, NAR chief economist, notes that the pace of decline moderated, but the leading indicator has fallen sharply and quickly from the peak, suggesting much lower business opportunities for commercial real estate practitioners engaged in leasing, sales and property management.

"Any meaningful recovery is not likely to occur before the second half of next year," Yun says.

NAR says the decline is driven by falling industrial production, far fewer jobs requiring office and retail space, a fall in durable goods shipments, much lower personal spending, lower retail and wholesale sales, and a negative return on commercial investment.

"With the economic recession likely coming to an end within six months, a recovery in commercial real estate may soon follow," Yun adds. "The office sector requires job growth to fuel the demand for additional space, the industrial sector needs a rise in production and the retail sector is tied to consumer spending. Multifamily housing – the apartment market – often performs in reverse to trends in home sales, but can improve if there is sufficient household growth."

NAR Commercial Alliance Committee chair Robert Toothaker notes the importance of improving the availability of funds for commercial loans. "Properties with positive cashflow have had trouble finding financing to roll over debt, transactions are essentially at a standstill and new development is virtually nonexistent in most areas," he says.

While Toothaker hailed TALF's extension, he cautions that absent a "tremendous short-term recovery" in the commercial real estate markets, the Fed might have to again consider extending the program early next year.



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