The National Association of Realtors said today it is developing a new leading indicator for the commercial real estate market, the first of its kind, scheduled for launch early in 2006. The announcement took place in San Francisco at NAR’s annual Conference & Expo.

The National Association of Realtors said today it is developing a new leading indicator for the commercial real estate market, the first of its kind, scheduled for launch early in 2006. The announcement took place in San Francisco at NAR’s annual Conference & Expo.

David Lereah, NAR’s chief economist, said the Commercial Real Estate Leading Indicator will incorporate data from a variety of indicators proven to affect commercial real estate activity. “Modeling a relationship between economic and commercial market indicators, as well as market trends and sentiment, will provide us with a new tool in assessing market behavior in the major commercial real estate sectors,” he said. “It is being designed as an index to provide early signals of turning points between expansions and slowdowns in commercial real estate activity.”

It is widely accepted that commercial market activity lags general economic activity, so timely information is needed to make better-informed decisions. NAR is reviewing a variety of indicators that can affect commercial real estate activity, studying the relationships of those indicators and modeling a forward looking index based on historic trends.

“Eventually, this data will be more directly coupled with attitudinal responses from our Commercial Practitioner Survey. This is a new survey which focuses on sentiment regarding local commercial market conditions, so as we develop a time series we can refine the relationship between those findings and data points in the index as it matures in the future,” Lereah said.

James Marrelli, NAR vice president of commercial real estate, said creation of a new indicator marks the maturation of a commercial real estate focus inside the association with more than 100,000 members offering commercial services. “This index will be the fulfillment of a key strategic objective, and the need for such an indicator has been growing over time. Up to now, commercial decision makers have relied on recent hard data and assumptions about future direction,” he said.

“With development of the Commercial Real Estate Leading Indicator, we are bringing forth a full spectrum of critically important information to provide better guidance on where the commercial real estate markets are headed, and to aid market makers in developing strategies for the future,” said Marrelli.

The quarterly index will incorporate data from existing statistical series that are demonstrated historically to impact the commercial real estate market. Although individual indicators sometimes move in opposite directions, together they often offer a better indication of future market activity.

Eleven series currently are being evaluated, including several related to employment, as well as industrial production, durable goods shipment, wholesale and retail sales, real estate investment trust (REIT) prices and trade. The index will evaluate the relationship of theses indicators with space absorption figures for the office, retail and industrial sectors, and the value of construction put in place for private non-residential investment. Unique weights will be assigned to each index component, and are likely to be modified over time, as may the components themselves depending on availability and relevancy of the series in the future.

Preliminary estimates of the working model for the Commercial Real Estate Leading Indicator show a modest improvement between the second and third quarters of 2005. “This implies that commercial activity, which has increased over the past five quarters, will likely increase well into 2006,” Lereah said.

In addition, some attitudinal results from the Commercial Practitioner Survey in October show most respondents rate current business activity as being stable or moderately improving; 13 percent said it was deteriorating.

On balance, to find the right space or property for a client, most practitioners said there are fewer choices but that it is not a major problem; 32 percent said there was no problem.

When asked about the relationship between rents and operating costs, the results were almost equal for costs rising faster than rent, and for both of them rising at about the same rate; nearly one out of five said rents were rising faster in their area.

Regarding expectations for business conditions over the next year, most practitioners are moderately optimistic and 14 percent were pessimistic.

Three-fourths said recent interest-rate increases have not impacted investor activity in their market, and 60 percent report new non pre-leased commercial development is currently occurring in their area.

More than 26,000 Realtors and guests are attending the Oct. 28-31 meetings in San Francisco.

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