Commercial Real Estate Index Continues Rise in Second Quarter
Washington, DC - A forward-looking index for the commercial real estate market recorded its ninth consecutive improvement in the second quarter, according to the National Assn. of REALTORS®.
The Commercial Leading Indicator for Brokerage Activity (1) rose 0.5% to an index of 120.7 in the second quarter, the highest on record, from a downwardly revised reading of 120.1 in the first quarter, and is 1.1% higher than the second quarter of 2006 when it stood at 119.7. NAR’s track of the index dates back to 1990.
Lawrence Yun, NAR senior economist, said the commercial sectors are benefiting most from rises in industrial production, shipments of durable goods and wholesale trade. “Despite some signs of slower overall economic expansion, the rise in the index means net absorption of space in the industrial and office sectors is likely to expand over the next six to nine months,” he said. “In addition, an improvement in returns on investment implies healthy rent increases for commercial property owners.”
Positive movements in the index components more than offset a fall in the National Assn. of Real Estate Investment Trusts price index. The net gain in NAR’s index also indicates modestly higher completions of overall office, warehouse, retail and lodging structures.
“In short, the latest data suggests improved business opportunities for commercial real estate practitioners in the months ahead,” Yun said.
Net absorption in the office and industrial sectors in the fourth quarter of 2007 is expected to be 30 million to 40 million square feet, with about $365 billion to $375 billion in new completed commercial construction activity, compared with $343 billion of new construction reported in the second quarter of this year. (2)
The rise in the commercial leading indicator also implies that commercial real estate practitioners could expect leasing and sales activity in the fourth quarter of this year to be about 1.1 percent higher than the fourth quarter of 2006.
The commercial leading indicator is a tool to assess market behavior in the major commercial real estate sectors. The index incorporates 13 variables that reflect future commercial real estate activity, weighted appropriately to produce a single indicator of future market performance, and is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate.
The 13 series in the index are industrial production, the REIT (real estate investment trust) price index, NCREIF (National Council of Real Estate Investment Fiduciaries) total return, personal income minus transfer payments, jobs in financial activities, jobs in professional business service, jobs in temporary help, jobs in retail trade, jobs in wholesale trade, initial claims for unemployment insurance, manufacturers’ durable goods shipment, wholesale merchant sales, and retail sales and food service.
More than 120,000 NAR members offer commercial services, and 68,000 of those are currently members of the REALTORS® Commercial Alliance, NAR’s commercial division.
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(1) NAR reviewed a wide variety of indicators, examined the relationships of indicators that demonstrated a historical impact on commercial real estate, and modeled a forward-looking index based on historic trends. Although individual indicators sometimes move in opposite directions, together they offer a better indication of future market activity.
Quarterly data for 13 selected series were reviewed back through the first quarter of 1990 (table attached). The modeling demonstrated a change in commercial brokerage activity that could be seen two quarters later as measured by net absorption in the industrial and office sectors, and the completion of new commercial buildings as measured by the value of building construction put-in-place of office, warehouse, retail and lodging structures. An index of 100 is defined as the level of commercial real estate market activity during the first quarter of 1990, the first period to be analyzed.
(2) The dollar figures are seasonally adjusted annualized rates as recorded by the U.S. Department of Commerce.