The National Association of Realtors launched a new leading indicator for the commercial real estate market today that shows an increase in commercial brokerage activity can be expected over the next six to nine months.

David Lereah, NAR’s chief economist, said the new index shows the broad recovery in commercial real estate markets will continue. “In fact, the index increased in nine of the last 10 quarters this trend implies that commercial activity of net absorption and the completion of new buildings will remain solid through the third quarter of this year.”

The Commercial Leading Indicator for Brokerage Activity is a new tool to assess market behavior in the major commercial real estate sectors. “The index incorporates 13 variables that reflect future commercial real estate activity,” Lereah said. “Our methodology follows a well-known process of looking at changes in individual indicators and then weighting them appropriately in a process that results in a single indicator of future market activity.”

The index is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate. 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. 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 value of building construction put-in-place on completion of retail, office, warehouse 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.

During the fourth quarter of 2005, the commercial leading indicator was at an index reading of 117.6, up 0.8 percent from 116.7 in the third quarter; the reading was 1.6 percent above an index of 115.7 in the fourth quarter of 2004.

Net absorption in the office and industrial sectors during the third quarter of 2006 is likely to be in the range of 125 million to 140 million square feet. The value of new commercial buildings reaching the market is projected to be $4.5 billion to $6 billion higher than the $252.4 billion recorded in the fourth quarter of 2005.

The 13 series in the index include 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.

Separately, attitudinal results from NAR’s Commercial Practitioner Survey in February show most respondents rate current business activity as moderately improving or holding steady; 12 percent said it was deteriorating.

On balance, to find the right space or property for a client, 36 percent of practitioners said there is limited ability and another 36 percent said there are fewer choices but that it is not a major problem.

When asked about the relationship between local rents and operating costs, 32 percent said costs are rising faster than rent, and 45 percent said both were rising at about the same rate; nearly a quarter said rents were rising faster.

Regarding expectations for business conditions over the next year, 74 percent of practitioners are optimistic and 9 percent are pessimistic.

In terms of market impact, 51 percent said private local investors are having a significant impact; 49 percent said developers, 25 percent end users, 17 percent private national investors and 11 percent said foreign investors.

With market fundamentals improving in most markets, 57 percent said new local tenants, users or start-ups were creating demand for space, 45 percent identified existing tenants or user expansion, and 27 percent said new national or international tenants or users.

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