Global and National Recession Analysis: First Half 2010


Overview

Market reports both globally and nationally have been asking the same question for the last two years, “Have we hit bottom yet?” From the American capital and leasing markets, to national unemployment rates, and continual occupancy rate declines, market analysis reports can agree; As far as the overall economy is concerned, December 2009 is tentatively being called the lowest point in the Great Global Recession. CB Richard Ellis noted industrial production and real GDP as two broad gauges of economic recovery, both of which showed positive figures in Q1 and Q2 2010. Within the national market, productivity per employee is currently functioning at an unsustainable level, thus indicating the necessity for the re-hiring of employees. A vital part of the overall economic recovery will be this initial sustained increase in the labor market, which, since December, has reclaimed 10.5% of the 8.4 million jobs lost during the recession.

Investment in Structures & GDP

One area of the non-residential fixed investment category, investment in structures, sustained a decline by 18% annualized over Q2 and ultimately reduced GDP growth by 0.6 percentage points. Worsening market fundamentals in the corporate real estate market impede the necessary demand for new construction, thus further paralyzing the already stagnant construction market. In the graph provided by the Bureau of Economic Analysis, it is clear the Recession has crippled investment in commercial structures, and the Jones Lang LaSalle research team reported that several consecutive quarters of sustainable growth in the overall economy are required to return this investment category of GDP to growth.

Issues at Hand

The U.S. and Global economies have tentatively hit rock bottom, although economist David Rosenberg reported in the Wall Street Journal there is a 50/50 chance this could be a “double-dip” recession.  With Greece shaking global economic confidence in their sovereign debt crisis and the phasing out of U.S. federal incentive programs for purchase of big ticket items (homes, cars, appliances) by year’s end, Q4 2010 may better position us to confidently claim stability in the economy.  The nation is ready for recovery, but the open question, given a slow growing labor market and retrenchment in stock market recovery, is whether the slight upward growth in Q1 and Q2 is enough of a trend to forecast a full economic recovery.

Corporate Tenants and Recovery

What has been reported across the Federal Reserve’s 12 districts remains to be a weak, yet moderately improving, recovery effort within the commercial real estate sector, although the commercial real estate sector is considered a lagging indicator of the overall economic recovery (CRE value trends tend to lag the overall economy by as much as 12 months). This segment of the economy is forecast to exhibit very little stabilization until the first half of 2011. Within CRE, tenants continue to rightsize, a term for “creative” downsizing, their companies, but a large majority of tenants have begun to settle into stabilizing mode, thus helping to drive real estate activity levels up, while allowing vacancy and absorption levels to become steady. As we have continued to negotiate leases from the tenant rep side, we have noticed Landlords providing fewer concessions; this stems from many landlords’ belief that the market has bottomed out. However, we believe there is still softness in almost all scenarios of market recovery, with the majority of markets around the nation still struggling for stability.

There is still ample opportunity for corporate tenants to plan and execute a real estate strategy which capitalizes on the softness of commercial real estate. As that plan is formulated, it is important to consider that once landlords sense a sustainable recovery, they will want to recoup their losses as soon as possible.

Author: Liam Murphy

Liam Murphy is a partner at Hayes Commercial Real Estate and supports many national clients in their commercial real estate needs. He holds the distinguished Certified Commercial Investment Member (CCIM) designation as a recognized expert in the disciplines of commercial and investment real estate. Less than 6 percent of the commercial real estate practitioners nationwide have earned the CCIM designation.

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